-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UYGK/q5G/qlZrGRjezuWt4zH5nYwLDpM06m/50+aUx7B+OBeii0u+FmzkPDq3lDf ymc71fSFATAVQ8ViaBYV2Q== 0000709337-97-000004.txt : 19970327 0000709337-97-000004.hdr.sgml : 19970327 ACCESSION NUMBER: 0000709337-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMERS NATIONAL BANC CORP /OH/ CENTRAL INDEX KEY: 0000709337 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 341371693 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12055 FILM NUMBER: 97563210 BUSINESS ADDRESS: STREET 1: 20 S BROAD STREET STREET 2: P O BOX 555 CITY: CANFIELD STATE: OH ZIP: 44406 BUSINESS PHONE: 2165333341 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1996 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 0-12055 Farmers National Banc Corp. (Exact name of registrant as specified in its charter) Ohio 34-1371693 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 20 South Broad Street Canfield, Ohio 44406 44406 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 330-533-3341 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The registrant estimates that as of February 24, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant (including 242,536 shares held by officers and directors of the registrant) was approximately $80,496,925. As of February 24, 1997, the registrant had outstanding 3,311,268 shares of common stock having no par value. DOCUMENTS INCORPORATED BY REFERENCE Parts of Form 10-K into which Document Document is Incorporated 1996 Annual Report to Shareholders II Definitive proxy statement for the 1996 Annual Meeting of Shareholders to be held on March 27, 1997 III Form 10-K Cross Reference Index to Annual Report to Shareholders Part I Item 1 - Business Description of Business 7 Average Balance Sheets/Interest /Rates 11 Securities 17 Risk Elements of Loan Portfolio 16 Loan Loss Experience 15 Deposits 18 Financial Ratios 10, 12 Short-Term Borrowings 30 Part II Item 5 Market For Registrant's Common Stock and Related Stockholder Matters 20 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 Item 8 Financial Statements and Supplementary Data 22-36 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None Part IV Report of Hill, Barth & King, Inc., Independent Auditors 21 Financial Statements: Consolidated Balance Sheets - December 31, 1996 and 1995 22 Consolidated Statements of Income - Calendar Years 1996, 1995 and 1994 23 Consolidated Statement of Changes in Stockholders' Equity - Calendar Years 1996, 1995 and 1994 24 Consolidated Statements of Cash Flows - Calendar Years 1996, 1995 and 1994. 25 Notes to Financial Statements 26-36 FARMERS NATIONAL BANC CORP. FORM 10-K 1996 INDEX Part I. Page Item 1. Business: General I-2 Volume and Rate Analysis I-7 Loans I-8 Allocation of Allowance For Loan Losses I-9 Deposits I-10 Item 2. Properties I-11 Item 3. Legal Proceedings I-11 Item 4. Submission of Matters to a Vote of Security Holders I-11 Part III. Item 10. Directors and Executive Officers of the Registrant III-1 Item 11. Executive Compensation III-2 Item 12. Security Ownership of Certain Beneficial Owners and Management III-2 Item 13. Certain Relationships and Related Transactions III-2 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K IV-1 Part I Item 1. Business General The Corporation The registrant, Farmers National Banc Corp. (herein sometimes referred to as the Corporation), is a one-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The only subsidiary is The Farmers National Bank of Canfield, which was acquired March 31, 1983. The Corporation and its subsidiary operate in one industry, domestic banking. The Corporation conducts no business activities except for investment in securities permitted under the Bank Holding Company Act. Bank holding companies are permitted under Regulation Y of the Board of Governors of the Federal Reserve System to engage in other activities such as leasing and mortgage banking. The Bank The Bank is a full-service national bank engaged in commercial and retail banking in Mahoning and Columbiana Counties, Ohio. The Bank's commercial banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage and installment loans, home equity loans, home equity lines of credit, night depository, safe deposit boxes, money orders, bank checks, automated teller machines and travelers checks, "E" Bond transactions, utility bill payments, MasterCard and Visa credit cards, and other miscellaneous services normally offered by Commercial Banks. In addition, the Bank offers Discount Brokerage Service. Supervision and Regulation The Corporation is a one bank holding company and is regulated by the Federal Reserve Bank (the "FRB"). The bank is a national bank and is regulated by the Office of the Comptroller of the Currency (the "OCC"), as well as the Federal Deposit Insurance Corporation (the "FDIC"). Changes have developed over the past several years regarding minimum capital requirements for financial institutions. A listing of the minimum requirements for capital and the Corporation's capital position as of December 31, 1996 are presented in Note J on page 31 of the annual report to shareholders for the year ended December 31, 1996 and is hereby incorporated by reference. The Corporation is subject to regulation under the Bank Holding Company Act of 1956, as amended. This Act restricts the geographic and product range of bank holding companies by defining the types and locations of institutions the holding companies can own or acquire. This act also regulates transactions between the Corporation and the bank and generally prohibits tie-ins between credit and other products and services. Supervision and Regulation (Continued) The bank is subject to regulation under the National Banking Act and is periodically examined by the OCC and is subject to the rules and regulations of the FRB. As an insured institution and member of the Bank Insurance Fund ("BIF"), the bank is also subject to regulation by the FDIC. Establishment of branches is subject to approval of the OCC and geographic limits established by state law. Ohio branch banking law permits a bank having its principal place of business in the State of Ohio to establish branch offices in any county in Ohio without geographic restrictions. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and several other federal banking statutes. Among other things, FDICIA requires federal banking agencies to broaden the scope of corrective action taken with respect to banks that do not meet minimum capital requirements and to take such actions promptly in order to minimize losses to the FDIC. FDICIA established five capital tiers: "well capitalized"; "adequately capitalized"; "undercapitalized"; "significantly undercapitalized"; and "critically undercapitalized" and imposes significant restrictions on the operations of a depository institution that is not in either of the first two of such categories. A depository institution's capital tier will depend upon the relationship of its capital to various capital measures. A depository institution will be deemed to be "well capitalized" if it significantly exceeds the minimum level required by regulation for each relevant capital measure, "adequately capitalized" if it meets each such measure, "undercapitalized" if it is significantly below any such measure and "critically undercapitalized" if it fails to meet any critical capital level set forth in regulations. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating or is deemed to be in an unsafe or unsound condition or to be engaging in unsafe or unsound practices. Under regulations adopted under these provisions, for an institution to be well capitalized it must have a total risk-based capital ratio of at least 10%, a Tier I risk-based capital ratio of at least 6% and a Tier I leverage ratio of at least 5% and not be subject to any specific capital order or directive. For an institution to be adequately capitalized, it must have a total risk-based capital ratio of at least 8%, a Tier I risk-based capital ratio of at least 4% and a Tier I leverage ratio of at least 4% (or in some cases 3%). Under the regulations, an institution will be deemed to be undercapitalized if the bank has a total risk-based capital ratio that is less than 8%, a Tier I risk-based capital ratio that is less than 4% or a Tier I leverage ratio of less than 4% (or in some cases 3%). An institution will be deemed to be significantly undercapitalized if the bank has a total risk-based capital ratio that is less than 6%, a Tier I risk-based capital ratio that is less than 3%, or a leverage ratio that is less than 3% and will be deemed to be critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2%. Supervision and Regulation (Continued) FDICIA generally prohibits a depository institution from making a capital distribution (including payment of dividends) or paying management fees to any entity that controls the institution if it thereafter would be undercapitalized. If an institution becomes undercapitalized, it will be generally restricted from borrowing from the Federal Reserve, increasing its average total assets, making any acquisitions, establishing any branches or engaging in any new line of business. An undercapitalized institution must submit an acceptable capital restoration plan to the appropriate federal banking agency, which plan must, in the opinion of such agency, be based on realistic assumptions and be "likely to succeed" in restoring the institution's capital. In connection with the approval of such a plan, the holding company of the institution must guarantee that the institution will comply with the plan, subject to a limitation of liability equal to a portion of the institution's assets. If an undercapitalized institution fails to submit an acceptable plan or fails to implement such a plan, it will be treated as if it is significantly undercapitalized. Under FDICIA, bank regulators are directed to require "significantly undercapitalized" institutions, among other things, to restrict business activities, raise capital through a sale of stock, merge with another institution and/or take any other action which the agency determines would better carry out the purposes of FDICIA. Within 90 days after an institution is determined to be "critically undercapitalized", the appropriate federal banking agency must, in most cases, appoint a receiver or conservator for the institution or take such other action as the agency determines would better achieve the purposes of FDICIA. In general, "critically undercapitalized" institutions will be prohibited from paying principal or interest on their subordinated debt and will be subject to other substantial restrictions. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits. Undercapitalized institutions are prohibited from offering interest rates on deposits significantly higher than prevailing rates. The provisions of FDICIA governing capital regulations became effective on December 19, 1992. FDICIA also directs that each federal banking agency prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, a maximum ratio of classified assets to capital, a minimum ratio of market value to book value for publicly traded shares (if feasible) and such other standards as the agency deems appropriate. Supervision and Regulation (Continued) FDICIA also contains a variety of other provisions that could affect the operations of the Corporation, including new reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, the requirement that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch, limitations on credit exposure between banks, restrictions on loans to a bank's insiders and guidelines governing regulatory examinations. Pursuant to FDICIA, the FDIC has developed a transitional risk-based assessment system, under which, beginning on January 1, 1993, the assessment rate for an insured depository institution varied according to its level of risk. An institution's risk category will depend upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized and whether it is assigned to Subgroup A, B or C. Subgroup A institutions are financially sound institutions with few minor weaknesses; Subgroup B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Subgroup C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the area of weakness. Based on its capital and supervisory subgroups, each BIF member institution will be assigned an annual FDIC assessment rate per $100 of insured deposits. INTERSTATE BANKING AND BRANCHING LEGISLATION The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") authorizes interstate acquisitions of banks and bank holding companies without geographic constraint beginning September 29, 1995. Beginning June 1, 1997, the IBBEA also authorizes banks to merge with banks located in another state provided that neither state has "opted out" of interstate branching between September 29, 1994 and May 31, 1997. States also may enact legislation permitting interstate merger transactions prior to June 1, 1997. After acquiring interstate branches through a merger, a bank may establish additional branches in that state at the same locations as any bank involved in the merger could have established branches under state and federal law. In addition, a bank may establish a de novo branch in another state that expressly permits the establishment of such branches. A bank that establishes a de novo interstate branch may thereafter establish additional branches on the same basis as a bank that has established interstate branches through a merger transaction. If a state "opts out" of interstate branching, no bank from another state may establish a branch in that state, whether through a merger or de novo establishment. Several states are considering legislation to opt out of the interstate branching provisions of the IBBEA or, alternatively, to permit interstate branching prior to the June 1, 1997 statutory effective date. It is not possible to predict the full impact of these actions on the Bank or the Corporation until May 31, 1997, the date by which all such statutes must be adopted. Competition The Bank competes with state and national banks located in Mahoning and Columbiana counties. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions and commercial finance and leasing companies, for deposits, loans and service business. Money market mutual funds, brokerage houses and similar institutions provide in a relatively unregulated environment many of the financial services offered by the Bank. Many competitors have substantially greater resources than the Bank. In the opinion of management, the principal methods of competition are the rates of interest charged for loans, the rates of interest paid for funds, the fees charged for services and the availability of services. RATE AND VOLUME ANALYSIS The following table analyzes by rate and volume the dollar amount of changes in the components of the interest differential:
(In Thousands of Dollars) 1996 change from 1995 1995 change from 1994 Net Change Due Change Due Net Change Due Change Due Change To Volume To Rate Change To Volume To Rate Tax Equivalent Interest Income Interest-earning assets: Loans $2,939 $2,393 $546 $1,669 $974 $695 Taxable securities 169 65 104 21 (181) 202 Tax-exempt securities 13 15 (2) 19 (9) 28 Federal funds sold (199) (154) (45) 527 306 221 Total interest income $2,922 $2,319 $603 $2,236 $1,090 $1,146 Interest Expense Time deposits $890 $817 $73 $1,907 $831 $1,076 Savings deposits (55) 41 (96) (270) (184) (86) Demand deposits 83 77 6 (132) (29) (103) Repurchase agreements 57 90 (33) 151 40 111 Borrowings 94 110 (16) 32 7 25 Total interest expense $1,069 $1,135 ($66) $1,688 $665 $1,023 Increase in tax equivalent net interest income $1,853 $548 The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.
Loans Total net loans were $263,504,434 at year-end 1996 compared to $229,248,832 at year-end 1995. This is an increase of $34,255,602, or 14.94%. Loans comprised 81.1% of the Bank's average earning assets during 1996, compared to 78.8% in 1995. The product mix in the Loan Portfolio shows Commercial Loans comprising 9.9%, Real Estate Mortgage Loans 39.2% and Installment Loans to Individuals 50.9% at December 31, 1996, compared with 9.7%, 42.5% and 47.8%, respectively, at December 31, 1995. Loans contributed 86.5% of total interest income in 1996 compared to 84.6% in 1995. Loan yield was 8.59% in 1996, 46 basis points greater than the average rate for total earning assets. Management recognizes that while the Loan Portfolio holds some of the Bank's highest yielding assets, it is inherently the most risky portfolio. Accordingly, Management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function which monitors credits during and after the approval process. To minimize risks associated with changes in the borrower's future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral. Installment Loans to Individuals increased from $110,805,000 on December 31, 1995 to $135,832,000 on December 31, 1996 which represents a 22.6% increase. Management continues to target the automobile dealer network to purchase indirect Installment Loans. Dealer paper was purchased using strict underwriting guidelines with an emphasis on quality. Indirect Loans comprise 77% of the Installment Loan Portfolio. Net loan losses on the Installment Loan portfolio were $275,000 in 1996 as compared to $148,000 in 1995. This represents .20% of total Installments Loans outstanding for 1995 and .14% for 1995. Real Estate Mortgage Loans increased to $104,389,000 at December 31, 1996, an increase of 5.8% over 1995. These loans are all made within the Bank's primary market area. The corporation originated both fixed rate and adjustable rate mortgages during 1996. All mortgage loans made in 1996 are held in the Mortgage Loan portfolio and are not sold on the secondary market. Fixed rate terms are limited to fifteen year terms while adjustable rate products are offered with maturities up to thirty years. Commercial Loans at December 31, 1996 increased from year-end 1995 with outstanding balances of $26,481,000. This portfolio is comprised of primarily variable rate loans. The Bank's commercial loans are granted to customers within the immediate trade area of the Bank. The mix is diverse, covering a wide range of borrowers and business types. The Bank monitors and controls concentrations within a particular industry or segment of the economy. These loans are made for purposes such as equipment purchases, capital improvements, the purchase of inventory, general working capital purposes and small business lines of credit. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The allowance for possible loan and lease losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of the dates indicated:
(In Thousands of Dollars) December 31, 1996 1995 1994 1993 1992 Loans Loans Loans Loans Loans to to to to to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Commercial, Financial and Agricultural $1,873 9.9% $1,800 9.7% $1,700 11.2% $1,692 11.9% $1,599 12.8% Real Estate- Mortgage 263 39.2% 250 42.5% 200 42.6% 170 40.1% 75 38.0% Installment Loans to Individuals 1,062 50.9% 861 47.8% 846 46.2% 759 48.0% 600 49.2% $3,198 100.0% $2,911 100.0% $2,746 100.0% $2,621 100.0% $2,274 100.0% The allocation of the allowance as shown in the table above should not be interpreted as an indication that charge-offs in 1997 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 losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
Deposits Deposits represent the Corporation's principal source of funds. The deposit base consists of demand deposits, savings and money market accounts and other time deposits. During the year, the Corporation's total deposits grew from $267,955,000 in 1995 to $283,811,000 in 1996, which equates to an increase of 5.9% . Most of this growth occurred in time deposits, which increased from $119,468,000 in 1995 to $129,651,000 in 1996. This increase is primarily the result of a special rate offering on certificates of deposit occurring in the fourth quarter of the year which generated approximately $7,200,000 in new money to the Corporation. As a result of this special offering, the overall cost of time deposits increased slightly, from 5.71% in 1995 to 5.77% in 1996. Item 2. Properties Farmers National Banc Corp.'s Properties The Farmers National Banc Corp. owns no property. Operations are conducted at 20 South Broad Street, Canfield, Ohio. Bank Property The Main Office is located at 20 S. Broad Street, Canfield, Ohio. The other eight offices of the bank are: Austintown Office 22 N. Niles-Canfield Rd., Youngstown, Ohio Lake Milton Office 17817 Mahoning Avenue, Lake Milton, Ohio Cornersburg Office 3619 S. Meridian Rd., Youngstown, Ohio Colonial Plaza Office 401 E. Main St. Canfield, Ohio Western Reserve Office 102 W. Western Reserve Rd., Youngstown, Ohio Salem Office 1858 E. State Street, Salem, Ohio Columbiana Office 340 State Rt. 14, Columbiana, Ohio Leetonia Office 16 Walnut St., Leetonia, Ohio Damascus Office 29053 State Rt. 62 Damascus, Ohio The bank owns the Main Office, Austintown, Cornersburg, Lake Milton, Salem, Columbiana, Leetonia and Damascus Offices. The Colonial Plaza and Western Reserve offices are occupied under operating leases expiring at various times to 1999. All of the leases provide for renewal options in favor of the bank. Item 3. Legal Proceedings There are no material pending legal proceedings to which the registrant or its subsidiary is a party or of which any of its property is subject, except proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material affect on the consolidated financial position of the registrant or its subsidiary. Item 4. Submission of Matters to a Vote of Security Holders There are no matters submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 1996. PART III Item 10. Directors and Executive Officers of the Registrant Information relating to Directors is set forth in the registrant's definitive proxy statement, which was used in connection with its annual meeting of shareholders which will be held March 27, 1997. The proxy statement is attached hereto. Executive Officers of the Registrant The names, ages and positions of the executive officers as of March 1, 1997: Name Age Position Held William D. Stewart 67 Chairman Richard L. Calvin 70 Vice Chairman Frank L. Paden 46 President and Secretary Carl D. Culp 33 Executive Vice President and Treasurer Donald F. Lukas 50 Senior Vice President Adrianne R. Kempers 39 Auditor Officers are elected annually by the Board of Directors immediately following the annual meeting of shareholders. The term of office for all the above executive officers is for the period ending with the next annual meeting. Principal Occupation and Business Experience of Executive Officers Mr. William D. Stewart has served as Chairman since March 1996. Prior to that time, he was President and Secretary since the inception of registrant on March 31, 1983, was President of the Bank since 1972 and has held various other executive positions with the Bank. Mr. Richard L. Calvin has served as Vice Chairman since March 1996. Prior to that time, he was Executive Vice President and Treasurer of the registrant since its inception on March 31, 1983, was Executive Vice President of the bank since 1972 and has held various other executive positions with the Bank. Mr. Frank L. Paden has served as President and Secretary since March 1996. Prior to that time he was Executive Vice President of the registrant since March 1995, was Executive Vice President of the Bank since March 1995 and has held various other executive positions with the Bank. PART III, (Continued) Mr. Carl D. Culp has served as Executive Vice President and Treasurer since March 1996. Prior to that time he was Controller of the registrant since November 1995 and was Controller of the Bank since November 1995. Mr. Donald F. Lukas has served as Senior Vice President of the registrant since March 1996. Prior to that time, he was Vice President of the Bank since March 1987. Ms. Adrianne R. Kempers has served as Auditor of the registrant since November 1995 and as Auditor of the Bank since November 1995. Item 11. Executive Compensation Information regarding this item is set forth in the registrant's definitive proxy statement, which was used in connection with its annual meeting of shareholders which will be held March 27, 1997. The proxy statement is attached hereto. Item 12. Security Ownership of Certain Beneficial Owners and Management Information relating to this item is set forth in the registrant's definitive proxy statement, which was used in connection with its annual meeting of shareholders which will be held March 27, 1997. The proxy statement is attached hereto. Item 13. Certain Relationships and Related Transactions Information regarding this item is set forth in the registrant's definitive proxy statement, which was used in connection with its annual meeting of shareholders which will be held March 27, 1997. The proxy statement is attached hereto. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)1. Financial Statements Included in Part II of this report Item 8., Financial Statements and Supplementary Data is set forth in the registrant's 1996 Annual Report to Shareholders and is incorporated by reference in Part II of this report. (a)2. Financial Statement Schedules Page Accountant's consent IV-2 All schedules are omitted because they are not applicable. (a)3. Exhibits The exhibits filed or incorporated by reference as a part of this report are listed in the Index of Exhibits, which appears at page IV-4 hereof and is incorporated herein by reference. (b) Report on Form 8-K No reports were filed for three months ended December 31, 1996. INDEPENDENT AUDITORS' CONSENT FARMERS NATIONAL BANC CORP.: We hereby consent to the incorporation by reference in this Registration Statement of our report dated January 23, 1997, relating to the consolidated financial statements of Farmers National Banc Corp. and subsidiary. /s/ HILL, BARTH & KING, INC. Warren, Ohio March 25, 1997 SIGNATURES Pursuant to the requirements of Section 13 or 15(D) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the under signed, thereunto duly authorized. Farmers National Banc Corp. Farmers National Banc Corp. by__________________________ by_____________________________ Frank L. Paden Carl D. Culp President and Secretary Executive Vice President and Treasurer ________________________ Chairman March 25, 1997 William D. Stewart ________________________ Director March 25, 1997 Benjamin R. Brown ________________________ Vice Chairman March 25, 1997 Richard L. Calvin ________________________ Director March 25, 1997 Joseph O. Lane ________________________ Director March 25, 1997 David C. Myers ________________________ Director March 25, 1997 Edward A. Ort ________________________ President March 25, 1997 Frank L. Paden and Director ________________________ Director March 25, 1997 Ronald V. Wertz INDEX TO EXHIBITS The following exhibits are filed or incorporated by references as part of this report: 2. Not applicable. 3(i). Not applicable. 3(ii). Not applicable. 4. The registrant agrees to furnish to the Commission upon request copies of all instruments not filed herewith defining the rights of holders of long-term debt of the registrant and its subsidiaries. 9. Not applicable. 10. Not applicable. 11. Not applicable. 12. Not applicable. 13. Annual Report to security holders (filed herewith). 16. Not applicable. 18. Not applicable. 21. Subsidiaries of the registrant (filed herewith). 22. Not applicable. 23. Not applicable. 24. Not applicable. 27. Financial Data Schedule (filed herewith) 99. Definitive Proxy Statement (filed herewith) Copies of any exhibits will be furnished to shareholders upon written request. Request should be directed to Carl D. Culp, Executive Vice President, Farmers National Banc Corp., 20 S. Broad Street, Canfield, Ohio 44406. EX-13 2 INSIDE FRONT COVER BOARD OF DIRECTORS Picture of Board of Directors William D. Stewart, Chairman of Farmers National Banc Corp. and of the Farmers National Bank of Canfield Richard L. Calvin, Vice Chairman of Farmers National Banc Corp. and of the Farmers National Bank of Canfield Frank L. Paden, President and Secretary of Farmers National Banc Corp.; President and Chief Executive Officer of the Farmers National Bank of Canfield Benjamin R. Brown, President - Castruction Co. Joseph O. Lane, President - Lane Funeral Homes, Inc. and Lane Life Corp. David C. Myers, President - Myers Equipment Corp. Edward A. Ort, President - Ort Furniture Manufacturing Co. Ronald V. Wertz, President - Boyer Insurance Inc. HIGHLIGHTS OF 1996 Selected Financial Data (In Thousands except Per Share Data)
Percent For the Year 1996 1995 Change Net Income $4,131 $3,576 15.52% Return on Average Assets 1.27% 1.20% 5.83% Return on Average Equity 11.60% 11.45% 1.31% Per Share Net Income $1.22 $1.09 * 11.93% Book Value 10.51 10.33 * 1.74% Balances at Year-End Assets $338,112 $314,229 7.60% Securities 47,079 47,333 -0.54% Net Loans 263,504 229,249 14.94% Deposits 283,811 267,955 5.92% Stockholders Equity 34,809 33,976 2.45% Shares Outstanding 3,311 3,290 * 0.64% Cash Dividends 1,455 1,268 14.75% * Adjusted to reflect weighted outstanding shares and adjusted for stock dividends and 2-for-1 stock split.
FORM 10-K A copy of the Annual Report filed with the Securities and Exchange Commission will be available on April 1, 1997 without charge upon written request to: Mr. Carl D. Culp, Treasurer Farmers National Banc Corp. 20 South Broad St. P.O. Box 555 Canfield, Ohio 44406 Mailing address and phone: Farmers National Banc Corp. 20 South Broad St. P.O. Box 555 Canfield, Ohio 44406 Phone: (330) 533-3341 The Annual Meeting of the Shareholders of Farmers National Banc Corp. will be held at Colonial Catering at 429 Lisbon St. Canfield, Ohio on Thursday, March 27, 1997 at 3:30 p.m. TABLE OF CONTENTS Highlights of 1996 1 Report to Stockholders 2-5 Officers 6 Description of Business 7 Selected Financial Data 8-11 Management's Discussion 12-19 Stock Prices and Dividends 20 Accountant's Report 21 Financial Data 22-36 PRESIDENT'S LETTER TO STOCKHOLDERS Dear Shareholders: The year 1996 is now a completed chapter in our 109 year history, a year characterized by corporate-wide achievements and individual milestones that light the way for our transition into the coming century. Farmers National Bank has a history of growth and success no other locally owned bank can match. This past year marks the fifteenth consecutive year that the Bank has been able to increase both assets and net income over the previous year. With great pleasure I share some of the highlights and accomplishments of your company that were attained in 1996. FINANCIAL PERFORMANCE Net income for the year reached a record high of $4.13 million, up 15.5 percent over 1995. Total assets for Farmers National Banc Corp. at year-end were $338 million, an increase of 7.6 percent over year-end 1995. The net income per share was $1.22 per share in 1996 as compared to $1.09 per share in 1995. This represents an 11.9 percent increase. Cash dividends paid on Farmers National Banc Corp. common stock were $.44 per share in 1996, representing a 10 percent increase over a year ago. These amounts have been adjusted to reflect the recent two-for-one stock split that was completed on January 17, 1997. In addition to the cash dividends and stock split, the Corporation also paid shareholders a 2% stock dividend in October 1996. Equity, in the form of capital ratios, is a measure used in defining safety within the banking industry. The $34.8 million in Shareholder Equity gives the Corporation a 10.18 percent Tier 1 capital to average asset ratio -- well above regulatory measures and near the top percentile in comparison to our peer group of banks. Shareholder participation in the Corporation's Dividend Reinvestment Plan continues to provide a source of additional capital to the Corporation. During 1996, shareholders reinvested cash dividends of $800,000 and made additional cash contributions in the amount of $1.7 million, totaling $2.5 million that was used to purchase shares of common stock in Farmers National Banc Corp. Picture of Bank Staff The higher earnings and returns were a result of several factors. Net interest income is the major factor that affects net income. In 1996, net interest income, before provision for loan losses, was $14.1 million as compared to $12.3 million in 1995. This 14 percent increase is a major reason for the favorable results for 1996. Total loans increased to record levels of $266.7 million at year-end 1996, a 15 percent increase from 1995. Other factors attributing to our successful results for 1996 include proper management of interest rate risks, ongoing monitoring of asset quality, active capital management and a tight control of overhead expenses. You will note from the financial information outlined in this report that Farmers National Banc Corp.'s operating and performance measurements identify continuing positive trends. Nineteen hundred and ninety-six was a financially successful year as detailed in the accompanying review, analysis and graphs. This review summarizes careful management of operating fundamentals, size of our Corporation and shareholder return. OPERATIONS During 1996, we completed the second phase of a total upgrade of data processing systems. This project included a new and improved delivery system for customer information and the implementation of a platform automation system for both loans and new accounts. These new systems enable the bank to be more efficient in delivering new products and services. Rapid changes in technology continue to challenge all business entities. We are committed to investigate and evaluate new and ongoing technology so that we can better position our Bank for the future and provide the services and products needed in the financial service industry. Rapid changes in technology continue to challenge all business entities. We are committed to investigate and evaluate new and ongoing technology so that we can better position our bank for the future and provide the services needed in the financial service industry. In October 1996, Farmers National Bank negotiated to purchase certain real estate and equipment located in Damascus, Ohio. This site represents the tenth community banking office for Farmers National Bank. This former bank office was remodeled and opened for business on January 6, 1997. We are excited about being a part of the Damascus community and look forward to a long and rewarding relationship. This office is the third branch bank that we have opened in the past twenty-four months. Picture of branch located in Damascus, Ohio Farmers National Bank will introduce "The Common Sense Card" during the first quarter of 1997. This debit card product will be made available to all depositors of Farmers National Bank and is to be used as an alternative to writing a check. We have chosen the VISA Check Card as our debit card affiliation because of it's acceptance and recognition. Transactions originated through the debit card will be processed similarly to a credit card transaction with the only difference being that funds are deducted from your checking account rather than a loan advance on your credit card. "The Common Sense Card" will automate transactions and offer the card holder additional features that I encourage you to utilize. Plans for 1997 also include the introduction of an automated phone system that will let our customers inquire on their accounts, transfer funds between accounts, make loan and utility payments and get current information concerning interest rates and bank products. Other products and services under study or in the development stage include home banking through your personal computer, check imaging and the viability of offering the non-traditional bank products -- alternative investment products, various types of insurance, annuities, financial planning and trust services. Another product that currently is near completion with plans to introduce in 1997, is our own WEB SITE page on the Internet. When all details are complete, you will be able to access various information about the bank on the Internet -- our domain name will be FNB-CANF.COM. Our long range plan is to provide our customers access to the Internet through a server that will be located in our bank. Our management team is changing elements of operations to take into account the fundamental changes in the banking industry, including consolidation and the growing number of activities that banks engage. As part of our Mission Statement and 1997 Strategic Plan, "... through the provisions of high quality, modern, progressive, and a complete line of products and services, The Farmers National Bank attempts to meet the financial needs of its customers. Our corporate mission is to maximize shareholder value and to act as the financial leader in the communities we serve as a locally owned, independent community banking organization." Picture of Bank Staff Everyone associated with Farmers National Bank would agree that 1996 was a noteworthy year in the storied history of this institution. As you recall, at the annual shareholder meeting held on March 28, 1996, Mr. William D. Stewart announced significant management changes that were to take place in 1996. The major thrusts of his message were changes in the executive and senior management positions of the bank. This management succession plan had been in planning over two years ago. The Board of Directors crafted the final chapter of this plan and used 1996 as the "transition" year for this new management team to be fully acclimated in their new positions by March 27, 1997, the date for this year's annual shareholder meeting. We have taken the opportunity to include various photos of this new management team. This group of individuals is a very dedicated, loyal group of individuals that are strongly committed to the continued success of Farmers National Bank. This group has many years of service with Farmers National Bank and each one of them has had the opportunity to work under the leadership of Mr. William D. Stewart and Mr. Richard L. Calvin. As planned in the year of transition, Mr. Stewart and Mr. Calvin both provided their expertise and knowledge to management as everyone moved forward in their new roles during 1996. Picture of William D. Stewart and Richard L. Calvin Mr. William D. Stewart, Chairman of the Board and Mr. Richard L. Calvin, Vice Chairman of the Board will officially step down as Executive Officers of the Bank at the annual reorganization meeting that will be held immediately following the Annual Shareholder Meeting on March 27, 1997. Combined, these two individuals have given Farmers National Bank a total of sixty-four years of service. Mr. Stewart started with the bank in 1967. He was elected to the Board of Directors in 1971 and was appointed as President in 1972, replacing Asa I. Skelton. He served in that capacity until 1996 at which time he was named Chairman of the Board. His vision and leadership guided Farmers National Bank through a period of unprecedented growth and expansion. In 1972, Farmers' total assets were $43 million and the bank had three offices. Mr. Stewart's efforts over the next twenty-three years saw the bank grow to ten community locations and assets in excess of $330 million. Mr. Stewart's accomplishments can be best recognized as evidenced by the strong community support that Farmers National Bank has gained through his leadership. Management, sound and safe business decisions, and his ability to gain shareholder support and loyalty are achievements that did not go unnoticed. Bill will continue to serve on the Board of Directors. Mr. Calvin was recently recognized for his thirty-five years of service to Farmers National Bank. He started with the bank in 1961 and held an officer title until being appointed as Executive Vice President in 1972 and was elected as a Director in 1975. Mr. Calvin was very instrumental in the development of the bank's branch network. The Austintown Office was opened in 1959 with Mr. Calvin serving as Manager of that office from 1961 to 1975, at which time he moved to the Main Office in Canfield. In his role as the chief operating officer, Richard guided the development of the bank as a single back-office system into a more efficient operating entity able to meet the regulatory requirements for the banking industry. Richard, too, will continue to serve as a Director. On a personal note, I want to express my sincere appreciation to both of these gentlemen. They have instilled a sense of pride and honor to all of us working for Farmers National Bank. Their efforts, loyalty and leadership are characteristics that will be used to help guide your Corporation in the twenty-first century. Thanks for a job well done. We wish a long and healthy retirement for both Bill & Wilma and Richard & Corrine, as they enjoy time with their children and grandchildren. In closing, I would like to offer special thanks to our shareholders, directors, officers, employees and customers for their loyal patronage of our services and steadfast commitment to our bank. We are extremely confident as we prepare for the twenty-first century, and we welcome you to be a part of it. Sincerely, Frank L. Paden President & CEO OFFICERS Officers - Farmers National Banc Corp. William D. Stewart Richard L. Calvin Frank L. Paden Chairman Vice Chairman President and Secretary Carl D. Culp Donald F. Lukas Adrianne R. Kempers Executive Vice President Senior Vice President Auditor & Treasurer Farmers National Bank of Canfield Officers & Management Frank L. Paden Andrew A. Baird President & CEO Assistant Cashier, Manager - Data Center Carl D. Culp Daniel G. Cerroni Executive Vice President, Assistant Cashier Cashier & CFO Main Office Loan Department Donald F. Lukas Joseph E. Chapman Senior Vice President, Assistant Cashier, Bank Systems Manager - Collection Department Adrianne R. Kempers Merle C. Garritano Auditor Assistant Cashier/Consumer Loans Mark L. Graham Diane Moran Vice President/Loan Administrator Mortgage Loan Department Anthony F. Peluso Janine M. Cox Vice President/Human Resources Credit Administration Alfred F. Ridel Joanie Orr Vice President/Consumer Loans General Ledger Accounting Officer Charles L. Burgoyne Phyllis A. Welton Assistant Vice President, Assistant Cashier, Loan Review & Compliance Manager - Bookkeeping Dept. Bradley S. Henderson Gary J. Rosati Assistant Vice President, Staff Legal Counsel Branch Administration & Security Roy A. Jackson Dorothy J. Weeden Assistant Vice President, Assistant Cashier, Indirect Lending Manager - Main Office Barbara C. Fisher Pamela J. Cleghorn Assistant Vice President, Manager, Colonial Plaza Marketing & Deposit Operations Susan E. Miller Keith A. Leonard Assistant Vice President, Assistant Cashier Corporate Services Administration Manager - Austintown Office Patricia C. Rosko Greg V. Walla Asst. Manager, Austintown Office Asst. Manager, Salem Office Geraldine J. Gbur Jane C. Logan Assistant Cashier, Asst. Manager, Columbiana Office Manager - Columbiana Office Kay A. Hedl Lynnita J. Kaschak Manager, Leetonia Office Asst. Manager, Leetonia Michele M. Ossoff Dennis S. Vitt Manager, Damascus Office Assistant Cashier, Manager - Lake Milton Office Jennifer C.Tikkanen Robert L. Rozeski Asst. Manager, Lake Milton Office Manager, Cornersburg Office Barbara L. Sitler Larry A. Staub Asst. Manager, Cornersburg Assistant Cashier, Manager - Western Reserve Office Claire F. Baldwin Larry E. White Asst. Manager, Assistant Vice President, Western Reserve Office Manager - Salem Office Brief Description of Business Farmers National Banc Corp. Farmers National Banc Corp. (the "Corporation") is a one-bank holding company formed under the Bank Holding Company Act of 1956, as amended, operating under regulations of the Board of Governors of the Federal Reserve System. Its principal subsidiary is The Farmers National Bank of Canfield, which was acquired March 31, 1983. Presently the Corporation and its subsidiary operate in one industry, domestic banking. The Corporation conducts no business activities except for investment in securities permitted under the Bank Holding Company Act. The Board of Directors of the Corporation and the Bank are identical. The officers of the Corporation are William D. Stewart, Chairman, Richard L. Calvin, Vice Chairman, Frank L. Paden, President and Secretary, Carl D. Culp, Executive Vice President and Treasurer, Donald F. Lukas, Senior Vice President, and Adrianne R. Kempers, Auditor. Bank holding companies are permitted under Regulation Y of the Board of Governors of the Federal Reserve System to engage in other activities considered closely related to banking such as leasing and mortgage banking. The Corporation has no other subsidiaries engaged in such activities at this time. The Farmers National Bank of Canfield The Bank is a full service national bank engaged in commercial and retail banking with the exception of trust services. The Bank's commercial banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage and installment loans, night depository, automatic teller machines, safe deposit boxes, money order services, travelers checks, government bond sales, food stamp redemption, utility bill payments, MasterCard and Visa Credit Cards, and other miscellaneous services normally offered by commercial banks. In addition, the Bank offers discount brokerage service through a correspondent bank. The Bank's main office is located at 20 South Broad Street, Canfield, Ohio. Business is conducted at a total of ten (10) offices located in the counties of Mahoning and Columbiana in Ohio. As a national banking association, the Bank is a member of the Federal Reserve System, subject to supervision and regulation of the Comptroller of the Currency and its deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. The Bank is affected also by the monetary and fiscal policies of the United States and of various regulatory agencies. The Bank competes with state and national banks located in Mahoning and Columbiana counties. The Bank also competes with a large number of other financial institutions, such as savings and loan associations, insurance companies, consumer finance companies, credit unions and commercial finance and leasing companies, for deposits, loans and service business. Money market mutual funds, brokerage houses and similar institutions provide, in a relatively unregulated environment, many of the financial services offered by the Bank. In the opinion of management, the principal methods of competition are the rates of interest charged for loans, the rates of interest paid for funds, the fees charged for services and the availability of services. As of December 31, 1996, the Corporation and its subsidiary had 178 employees. The bank considers its relations with its employees to be satisfactory. Picture of Exterior of Main Office GRAPHS AND CHARTS Line Graph Depicting Total Deposits in Thousands Year Amount 1992 $231,671 1993 $240,440 1994 $244,302 1995 $267,955 1996 $283,811 Line Graph Depicting Total Assets in Thousands Year Amount 1992 $265,440 1993 $275,385 1994 $284,445 1995 $314,229 1996 $338,112 Line Graph Depicting Return on Average Assets Year Rate 1992 1.10% 1993 1.16% 1994 1.22% 1995 1.20% 1996 1.27% Line Graph Depicting Net Income in Thousands Year Amount 1992 $2,825 1993 $3,160 1994 $3,424 1995 $3,576 1996 $4,131 Line Graph Depicting Net Loans in Thousands Year Amount 1992 $189,813 1993 $200,993 1994 $214,988 1995 $229,249 1996 $263,504 Line Graph Depicting Net Income Per Share Year Rate 1992 $0.97 1993 $1.04 1994 $1.09 1995 $1.09 1996 $1.22 Line Graph Depicting Efficiency Ratio Year Rate 1992 56.62% 1993 58.98% 1994 59.66% 1995 59.63% 1996 56.50% Line Graph Depicting Total Stockholders Equity in Thousands Year Amount 1992 $22,698 1993 $25,996 1994 $28,915 1995 $33,976 1996 $34,809 SELECTED FINANCIAL DATA (In Thousands except Per Share Data)
For the years Ending 1996 1995 1994 1993 1992 Summary of Earnings Total Interest Income (including fees on loans) $24,877 $21,961 $19,731 $20,166 $21,464 Total Interest Expense 10,756 9,688 8,000 8,738 10,273 Net Interest Income 14,121 12,273 11,731 11,428 11,191 Provision for Credit Losses 655 270 330 620 1,310 Total Other Income 1,478 1,342 1,357 1,298 1,270 Total Other Expense 8,883 8,119 7,755 7,473 7,013 Income Before Federal Income Taxes 6,061 5,226 5,003 4,633 4,138 Federal Income Taxes 1,930 1,650 1,579 1,473 1,313 NET INCOME 4,131 3,576 3,424 3,160 2,825 Per Share Data (Note) Net Income 1.22 1.09 1.09 1.04 0.97 Cash Dividends Paid 0.44 0.40 0.40 0.38 0.36 Book Value at Year-End 10.51 10.33 9.29 8.90 8.22 Balances at Year-End Total Assets 338,112 314,229 284,445 275,385 265,440 Earning Assets 319,449 294,122 268,724 260,965 248,484 Total Deposits 283,811 267,955 244,302 240,440 231,671 Net Loans 263,504 229,249 214,988 200,993 189,813 Total Stockholder's Equity 34,809 33,976 28,915 25,996 22,698 Average Balances Total Assets 325,537 297,159 279,839 273,257 256,160 Total Stockholder's Equity 35,629 31,177 27,221 24,557 21,390 Significant Ratios Return on Average Assets (ROA) 1.27% 1.20% 1.22% 1.16% 1.10% Return on Average Equity (ROE) 11.60 11.45 12.58 12.85 13.12 Average Earning Assets/Average Assets 94.88 94.75 94.91 94.55 94.24 Net Loans/Deposits 92.85 85.56 88.00 83.59 81.93 Allowance for Credit Losses/Total Loans 1.20 1.25 1.26 1.29 1.18 Allowance for Credit Losses/Nonperforming Loans 152.42 192.87 154.63 97.35 84.69 Efficiency Ratio 56.50 59.63 59.66 58.98 56.62 Cash Dividends as a Percentage of Net Income 35.22 35.46 34.45 33.41 32.83 Note: Per share data is based on weighted average shares outstanding adjusted for stock dividends and 2-for-1 stock split.
SELECTED FINANCIAL DATA Average Balance Sheets and Related Yields and Rates (In Thousands of Dollars)
Years ended December 31, 1996 1995 1994 EARNING ASSETS AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE Loans $250,616 $21,519 8.59% $221,955 $18,580 8.37% $210,148 $16,911 8.05% Taxable securities 40,334 2,352 5.83 39,167 2,183 5.57 42,352 2,162 5.10 Tax-exempt securities 7,434 683 9.19 7,266 670 9.22 7,364 651 8.84 Federal funds sold 10,506 562 5.35 13,181 761 5.77 5,721 234 4.09 Total earning assets 308,890 25,116 8.13 281,569 22,194 7.88 265,585 19,958 7.51 NONEARNING ASSETS Cash and due from banks 11,310 11,437 10,610 Premises and equipment 5,597 4,671 4,165 Allowance for Loan Losses (2,946) (2,897) (2,745) Other assets 2,686 2,379 2,224 Total Assets $325,537 $297,159 $279,839 INTEREST-BEARING LIABILITIES Time deposits $122,973 $7,095 5.77% $108,626 $6,205 5.71% $90,750 $4,298 4.74% Savings deposits 76,182 1,931 2.53 74,752 1,986 2.66 80,969 2,256 2.79 Demand deposits 51,890 1,092 2.10 48,267 1,009 2.09 49,280 1,141 2.32 Repurchase agreements 12,075 497 4.12 10,032 440 4.39 8,832 289 3.27 Borrowings 2,651 142 5.36 804 48 5.97 551 16 2.90 Total Interest-Bearing Liabilities 265,771 10,757 4.05 242,481 9,688 4.00 230,382 8,000 3.47 NONINTEREST-BEARING LIABILITIES Demand deposits 22,979 20,631 21,224 Other Liabilities 1,158 2,870 1,012 Stockholder's equity 35,629 31,177 27,221 Total Liabilities and Stockholders' Equity $325,537 $297,159 $279,839 Net interest income $14,359 $12,506 $11,958 Net interest income to earning assets 4.65% 4.44% 4.50% Fully taxable equivalent basis computed at 35% in 1996, 1995 and 1994.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The Corporation's net income totaled $4,131,415 during 1996, an increase of 15.52% from $3,576,229 for 1995. On a per share basis, net income was $1.22 for 1996 as compared to $1.09 for 1995 and 1994. Common comparative ratios for results of operations include the return on average assets and return on average stockholders equity. For 1996, the return on average equity was 11.60% as compared to 11.45% for 1995 and 12.58% for 1994. The return on average assets was 1.27% for 1996 as compared to 1.20% and 1.22% for 1995 and 1994, respectively. These results of operations are the direct result of management's concerted efforts to control expenses and increase interest from our interest bearing assets. Overall growth in deposits and the use of those funds in the loan portfolio, particularly installment and mortgage loans, together with control over the bank's general expenses have produced these results. Net Interest Income Net interest income, the principal source of the Corporation's earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 1996, net interest income increased $1,848,000 or 15.06% over 1995. The increase for 1995 was $542,000 or 4.62% over 1994. Interest-earning assets averaged $308,890,000 during 1996 representing a 9.70% increase over 1995, while 1995 averaged $281,569,000 or a 6.02% increase over 1994. The Corporation finances its earning assets with a combination of interest-bearing and interest-free funds. The interest-bearing funds are composed of deposits, short-term borrowings and long-term debt. Interest paid for the use of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits and stockholders equity, require no interest expense and, therefore, contribute significantly to net interest income. The profit margin, or spread, on invested funds is a key performance measure. The Corporation monitors two key performance indicators - net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 1996 the net interest margin, measured on a fully taxable equivalent basis, totaled 4.65% in comparison to 4.44% and 4.50% for 1995 and 1994, respectively. The increase in net interest income margin in 1996 was due in part to the increase in the interest rate environment and increased loan demand. Total interest income was $24,877,000 for 1996 as compared to $21,961,000 and $19,731,000 for 1995 and 1994, respectively. The 13.3% increase in interest income is largely attributed to a 14.94% increase in net loans and an increase in the interest rate earned from 8.37% to 8.59%. Net loans were $263,504,000 at year-end 1996 as compared to $229,249,000 at year-end 1995. Total interest expense amounted to $10,757,000 for 1996, representing an 11.03% increase from 1995 while interest expense of $9,688,000 for 1995 represents a 21.10% decrease from 1994. The increase in interest expense is primarily due to an increase in the level of time deposits and the average rate paid on these deposits. The average balances for time deposits increased by 13.2% over 1995 while the interest rate paid on those deposits increased by 6 basis points. Return on Equity and Assets Information for the years indicated as follows: 1996 1995 1994 Net income to average total assets 1.27% 1.20% 1.22% Net income to average equity 11.60% 11.45% 12.58% Dividends per share to net income per share 36.07% 36.04% 34.96% Average equity to average total assets 10.94% 10.49% 9.73% Other Income Other income increased $136,000 or 10.11% from 1995. Total other income for 1995 decreased $15,000 or 1.11% from 1994. The increase in other income is a result of increased levels of service charges and fees related to deposit accounts. Management continues to explore new products and services that could increase other income in future years. Other Expenses Total other expenses for 1996 increased 9.41% over 1995 as compared to an increase of 4.69% from 1995 over 1994. The rise in other expenses is primarily due to salary and employee benefits, which increased 15.78% from 1995. This increase is the result of hiring additional employees to staff the new branch offices. At December 31, 1996, the bank employed 170 full time equivalent employees compared to 154 in 1995. State and local taxes also increased 17.05% from 1995. Management will continue to closely monitor and keep the increases in other expenses to a minimum. Income Taxes Federal income taxes are computed using the appropriate effective tax rates for each period. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective federal income tax rate was 32% for the periods ending 1996, 1995 and 1994. Asset/Liability Management Important considerations in asset/liability management are liquidity, the balance between interest rate sensitive assets and liabilities and the adequacy of capital. Interest rate sensitive assets and liabilities are those which have yields on rates subject to change within a future time period due to maturity of the instrument or changes in market rates. While liquidity management involves meeting the funds flow requirements of the Corporation, the management of interest rate sensitivity focuses on the structure of these assets and liabilities with respect to maturity and repricing characteristics. Balancing interest rate sensitive assets and liabilities provides a means of tempering fluctuating interest rates and maintaining net interest margins through periods of changing interest rates. Although the Corporation does not match each of its interest sensitive assets against specific interest sensitive liabilities, it does monitor total assets and liabilities to determine the overall interest rate position over various time frames. As of year-end 1996, the Corporation had a negative gap at both three month and twelve month time periods. This liability sensitive position typically produces a favorable contribution to earnings during a period of decreasing rates. Although in general rates may rise, the Corporation has the capacity to take steps to minimize the negative effect of such movement. With the largest amount of interest sensitive assets and liabilities maturing within twelve months, the Corporation monitors this area most closely. The Corporation does not emphasize interest sensitivity analysis beyond this time frame because it believes various unpredictable factors could result in erroneous interpretations. Early withdrawal of deposits, prepayments of loans and loan delinquencies are some of the factors that could have such an effect. In addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change in net margin. Interest Rate Sensitivity
(In Thousands of Dollars) December 31, 1996 December 31, 1995 December 31, 1994 Total Within Total Within Total Within 3 month 12 month 3 month 12 month 3 month 12 month Total Interest-Sensitive Assets $36,137 $105,161 $44,064 $100,658 $36,940 $96,137 Total Interest-Sensitive Liabilities 56,249 112,027 55,706 103,701 53,912 77,970 Total Sensitivity Gap (20,112) (6,866) (11,642) (3,043) (16,972) 18,167 Ratio of Interest-Sensitive Assets to Interest-Sensitive Liabilities 0.64 0.94 0.79 0.97 0.69 1.23
Interest rate sensitivity management provides some degree of protection against net interest income volatility. It is not possible or necessarily desirable to attempt to eliminate this risk completely by matching interest sensitive assets and liabilities. Other factors, such as market demand, interest rate outlook, regulatory restraint and strategic planning also have an effect on the desired balance sheet structure. Liquidity The Corporation maintains, in the opinion of management, liquidity sufficient to satisfy depositors' requirements and meet the credit needs of customers. The Corporation depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Corporation's ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. Principal sources of liquidity for the Corporation include assets considered relatively liquid such as short- term investment securities, federal funds sold and cash and due from banks. Along with its liquid assets, the Corporation has additional sources of liquidity available which help to insure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at three major domestic banks. At December 31, 1996, the Corporation had not borrowed against these lines of credit. Management feels that its liquidity position is more than adequate and will continue to monitor the position on a monthly basis. The Corporation also has additional borrowing capacity with the Federal Home Loan Bank of Cincinnati, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. Advances outstanding from the Federal Home Loan Bank at December 31, 1996 amounted to $1,400,000. Cash flows generated from operating activities increased 19.48% to $6,289,000 in 1996 compared to $5,263,000 in 1995. This increase is a result of an increase in total interest received, as explained in the Net Interest Income section of this report. Cash flows used in investing activities increased 128% to $35,715,000 in 1996 compared to $15,681,000 in 1995. This is a result of increased loan demand, as net loans increased 14.9%. Cash flows provided from financing activities amount to $18,999,000 as compared to $25,305,000 in 1995. This drop is a result of a smaller increase in time deposits during 1996 compared to the activity in 1995. Maturities and Sensitivities of Loans to Interest Rates The following schedule shows the composition of loans and the percentage of loans in each category at the dates indicated:
(In Thousands of Dollars) Years Ended December 31, 1996 1995 1994 1993 1992 Commercial, Financial and Agricultural $26,481 9.9% $22,677 9.7% $24,477 11.2% $24,373 11.9% $24,572 12.8% Real Estate-Mortgage 104,389 39.2 98,678 42.5 92,773 42.6 81,726 40.1 73,043 38.0 Installment Loans to Individuals 135,832 50.9 110,805 47.8 100,484 46.2 97,515 48.0 94,432 49.2 Lease Financing 0 0.0 0 0.0 0 0.0 0 0.0 41 0.0 266,702 100.0 232,160 100.0 217,734 100.0 203,614 100.0 192,088 100.0 Less Unearned Income 0 0 0 0 1 Total Loans $266,702 100.0% $232,160 100.0% $217,734 100.0% $203,614 100.0% $192,087 100.0%
The following schedule sets forth maturities based on remaining scheduled repayments of principal for various categories of loans listed above as of December 31, 1996: (In Thousands of Dollars) Types of Loans 1 Year or less 1 to 5 Years Over 5 years Commercial, Financial and Agricultural $7,143 $2,399 $16,939 The amounts of commerical, financial and agricultural loans as of December 31, 1996, based on remaining scheduled repayments of principal, are shown in the following table: (In Thousands of Dollars) Loan Sensitivities 1 Year or less Over 1 year Total Floating or Adjustable Rates of Interest $5,464 $1,740 $7,204 Fixed Rates of Interest 1,679 17,598 19,277 Total Loans $7,143 $19,338 $26,481 Loan Portfolio Outstanding loans increased $34,542,000 or 15% in 1996. Most of this growth occurred in the installment loan portfolio, which increased from $110,805,000 in 1995 to $135,832,000 in 1996. Real estate mortgage loans also increased from $98,678,000 in 1995 to $104,389,000 in 1996 which represents a 6% increase over the past year. The bank's consumer loan portfolio represents approximately 51% of the banks total loans outstanding. These loans, which consist of automobile loans, home improvement loan, home equity lines of credit and credit card plans reported a 23% growth in 1996. Consumers continue to take advantage of the low interest rate environment with loans to purchase new automobiles and make capital improvements to their homes. The commercial loan balances outstanding have remained relatively stable over the past few years. All commercial loans are made to local small businesses for various purposes such as equipment purchases, capital improvements, the purchase of inventory or general working capital needs. This portfolio of $26,481,000 is primarily variable rate loans that play an important role in the banks monitoring of rate sensitive assets. Summary of Loan Loss Experience The following is an analysis of the allowance for loan and lease losses for the periods indicated:
(In Thousands of Dollars) Years Ended December 31, 1996 1995 1994 1993 1992 Balance at Beginning of Year $2,911 $2,746 $2,621 $2,274 $1,630 Loan Losses: Commercial, Financial and Agricultural (75) (1) (185) (69) (411) Real Estate-Mortgage (22) 0 0 (16) (63) Installment Loans to Individuals (455) (275) (202) (351) (332) Total Loan Losses (552) (276) (387) (436) (806) Recoveries on Previous Loan Losses: Commercial, Financial and Agricultural 9 44 39 36 36 Real Estate-Mortgage 15 0 0 7 0 Installment Loans to Individuals 160 127 143 120 104 Total Recoveries 184 171 182 163 140 Net Loan Losses (368) (105) (205) (273) (666) Provision Charged to Operations (1) 655 270 330 620 1,310 Balance at End of Year $3,198 $2,911 $2,746 $2,621 $2,274 Ratio of Net Loan and Lease Losses to Average Net Loans and Leases Outstanding 0.15% 0.05% 0.10% 0.14% 0.36% (1) The provisions for possible credit losses charged to operating expense is based on management's judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.
Provisions charged to operations increased from $270,000 in 1995 to $655,000 in 1996. The balance in the allowance for credit losses has increased substantially since 1992 to $3,198,000 or 1.20% of loans at December 31,1996. The substantial increase in provision charged to operations was a result of the 15% growth in loans during 1996. The allowance for possible loan and lease losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of the dates indicated:
(In Thousands of Dollars) December 31, 1996 1995 1994 1993 1992 Commercial, Financial and Agricultural $1,873 $1,800 $1,700 $1,692 $1,599 Real Estate-Mortgage 263 250 200 170 75 Installment Loans to Individuals 1,062 861 846 759 600 $3,198 $2,911 $2,746 $2,621 $2,274 The allocation of the allowance as shown in the table above should not be interpreted as an indication that charge-offs in 1997 will occur in the same proportions or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
Loan Commitments and Lines of Credit In the normal course of business, the banking subsidiary has extended various commitments for credit. Commitments for mortgages, revolving lines of credit and letters of credit generally are extended for a period of one month up to one year. Normally no fees are charged on any unused portion. An annual fee of two percent is charged for the issuance of a letter of credit. Risk Elements The following table sets forth aggregate loans in each of the following categories for the years indicated:
(In Thousands of Dollars) December 31, 1996 1995 1994 1993 1992 Loans Accounted For on a Nonaccrual Basis $0 $125 $302 $349 $453 Loans Contractually Past Due 90 Days or More as to Interest or Principal Payments (Not Included in Nonaccrual Loans Above) 2,098 1,384 1,475 2,343 2,232 Loans Considered Troubled Debt Restructuring (Not Included in Nonaccrual Loans or Contractually Past Due Above) 0 75 0 108 0 Management is not aware of any loans not included in the table above where serious doubt exists as to the ability of the borrower to comply with the current loan repayment terms.
Non-accrual loans are loans which are 90 days past due and with respect to which, in Management's opinion, collection of interest is doubtful. These loans no longer accrue interest and are accounted for on a cash basis. Loans which are 90 days or more past due but continue to accrue interest are loans which, in Management's opinion, are well secured and are in the process of collection. As of December 31, 1996, there were no concentrations of loans exceeding 25% of total loans which are not disclosed as a category of loans. As of that date also, there were no other interest-earning assets that are either nonaccrual, past due or restructured. The following shows the amounts of contracted interest income and interest income reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring for the periods indicated:
(In Thousands of Dollars) December 31, 1996 1995 1994 1993 1992 Gross Interest Income That Would have been Recorded if the Loans had been Current in Accordance with Their Original Terms $0 $5 $21 $40 $51 Interest Income Included in Income on the Loans 0 0 0 0 0
Investment Securities The investment securities portfolio decreased slightly during 1996. Our objective in managing the investment portfolio is to preserve and enhance corporate liquidity through investment in short and intermediate term securities which are readily marketable and of the highest credit quality. In general investment in securities is limited to those funds the bank feels it has in excess of funds used to satisfy loan demand and operating considerations. The following table shows the book value of investment securities by type of obligation at the dates indicated:
Type (In Thousands of Dollars) December 31, 1996 1995 1994 U.S. Treasury Securities and Government Agencies $31,449 $31,692 $29,887 Obligations of States and Political Subdivisons 7,501 6,943 8,013 Other Securities 8,130 8,698 10,106 $47,080 $47,333 $48,006
A summary of securities held at December 31, 1996, classified according to maturity and including weighted average yield for each range of maturities is set forth below:
(In Thousands of Dollars) Type and Maturity Grouping December 31, 1996 Weighted Book Average Value Yield (1) U.S. Treasury and U.S. Government Agency Securities: Maturing Within One Year $10,079 5.41% Maturing After One Year But Within Five Years 18,690 5.92% Maturing After Five Years But Within Ten Years 0 0.00% Maturing After Ten Years 2,680 6.47% Total U.S. Treasury and U.S. Government Agency Securities: $31,449 5.80% Obligations of States and Political Subdivisions Maturing Within One Year $796 7.81% Maturing After One Year But Within Five Years 1,070 8.22% Maturing After Five Years But Within Ten Years 2,884 8.94% Maturing After Ten Years 2,751 8.96% Total Obligations of States and Political Subdivisions $7,501 8.73% Other Securities Maturing Within One Year $2,621 6.54% Maturing After One Year But Within Five Years 5,509 6.41% Maturing After Five Years But Within Ten Years 0 0.00% Maturing After Ten Years 0 0.00% Total Other Securities $8,130 6.46% (1) The weighted average yield has been computed by dividing the total interest income adjusted for amortization of premium or accretion of discount over the life of the security by the par value of the securities outstanding. The weighted average yield of tax-exempt obligations of states and political subdivisions has been calculated on a fully taxable equivalent basis. The amounts of adjustments to interest which are based on the statutory tax rate of 34% were $21,142, $29,919, $87,652 and $83,803 for the four ranges of maturities.
Deposits Deposits represent the Corporation's principal source of funds. The deposit base consists of demand deposits, savings and money market accounts and other time deposits. Average Deposits The following table shows the classification of average deposits for the periods indicated:
(In Thousands of Dollars) Average Balances on December 31, 1996 1995 1994 Noninterest-Bearing Demand Deposits $22,979 $20,631 $21,227 Interest-Bearing Demand Deposits 51,890 48,267 49,281 Savings Deposits 76,182 74,752 80,969 Time Deposits 122,973 108,626 90,750 Total Average Deposits $274,024 $252,276 $242,227
The following shows the average rate paid on the following deposit categories for the periods indicated:
Years ended December 31, 1996 1995 1994 Interest-Bearing Demand Deposits 2.10% 2.09% 2.32% Savings 2.53% 2.66% 2.79% Time Deposits 5.77% 5.71% 4.74%
A summary of time deposits of $100,000 or more as of December 31, 1996 by maturity range is shown below: (In Thousands of Dollars) 3 Months or Less Remaining Until Maturity $5,221 3 to 6 Months Remaining Until Maturity 3,738 6 to 12 Months Remaining Until Maturity 2,606 Over 12 Months Remaining Until Maturity 10,864 Total Outstanding $22,429 The steady increase in total deposits over the years reflects managements' efforts to continue to insure the growth of the bank and to maintain a viable banking institution. During 1996, the bank has attracted deposits due to its effort to remain competitive in the local community as to rates paid for all types of deposits particularly in the time deposit area. The bank has been at or near the top in interest rates paid to depositors throughout 1996. Capital Resources The capital management function is a continuous process which consists of providing capital for both the current financial position and the anticipated future growth of the Corporation. Important to this process is internal equity generation, particularly through earnings retention. Internal capital generation is measured as the percent of return on equity multiplied by the percent of earnings retained. The return on average equity was 11.60%, 11.45% and 12.58% for 1996, 1995 and 1994, respectively. Total cash dividends declared in 1996 represented 35.22% of net income as compared to 35.46% in 1995 and 34.45% in 1994. The resulting internal equity growth percentage amounted to 7.51% in 1996 as compared to 7.39% in 1995 and 8.25% in 1994. The bank subsidiary, as a national bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. The Comptroller of the Currency must approve declaration of any dividends in excess of the sum of profits for the current year and retained net profits for the preceding two years (as defined). As of December 31,1996, the bank subsidiary had $2,710,723 of retained earnings available for distribution and $11,203,930 not available for distribution to the company as dividends without prior approval of the Comptroller of the Currency. The bank subsidiary is also required to maintain minimum amounts of capital to total "risk weighted" assets, as defined by the banking regulators. At December 31, 1996, the bank subsidiary is required to have a minimum Tier 1 and Total Capital ratios of 4.00% and 8.00%, respectively. The bank subsidiary's actual Tier 1 and Total Capital ratios at that date were 14.09% and 15.34% respectively. The bank subsidiary's leverage ratio at December 31, 1996 was 10.18%. Audit The Company's internal auditor, who is responsible to the Audit Committee of the Board of Directors, reviews the results and performance of operating units within the Company for adequacy, effectiveness and reliability of accounting and reporting systems, as well as managerial and operating controls. The Audit Committee consists of four nonemployee directors whose duties include: consideration of the adequacy of the internal controls of the Company and the objectivity of financial reporting; inquiry into the number, extent, adequacy and validity of regular and special audits conducted by independent public accountants and the internal auditors; the recommendation to the Board of Directors of independent accountants to conduct the normal annual audit and special purpose audits as may be required; and reporting to the Board of Directors the Committee's findings and any recommendation for changes in scope, methods or procedures of the auditing functions. The Audit Committee held four meetings during 1996. Compliance There are many activities in today's banking that are subject to compliance regulations. The bank's policies and procedures govern the way departments function and ensure fair, consistent and sound banking practices. When those policies and procedures are affected by new regulations, or regulation changes, the Compliance Department is responsible to change those policies involved, and is responsible to inform and train personnel. For example, many of the forms used in opening deposit accounts and loan accounts must subscribe to standards of format that are designed to protect and to inform the customer. Compliance is an ongoing effort that requires continuous training. New regulations are introduced, changes to existing regulations are made, employees change positions, and new employees are hired. Assessment is made for the training needs of the bank and then clearly communicated to all appropriate bank employees through training programs. Quite often, two to three sessions are required to reach all persons who need training due to conflicting schedules. From training, compliance objectives follow to monitoring or testing procedures. Monitoring can focus on a broad range of compliance issues and procedures, or it can be applied to limited areas. Often, the extent of monitoring relates to the complexity or length of the regulation. Upon the completion of monitoring projects, areas where training is needed may be revealed. The cycle of training, to monitoring, to training is ever continuing. It is our bank's mission to keep our employees well informed. We urge them to ask questions and to use initiative in becoming informed, as compliance regulations have become very complex. This all translates in efficient and better service for our customers. Information as to Stock Prices and Dividends The common stock of the Corporation is traded mostly through a local brokerage firm and some private sales. Set forth in the accompanying table are per share prices at which common stock of the Corporation has actually been purchased and sold in transactions during the periods indicated, to the knowledge of the corporation. Also included in the table are dividends per share paid on the outstanding common stock and any stock dividends paid. As of December 31, 1996, there were 1,704 shareholders of record of common stock. Market and Dividend Summary Dividend Date High Low Dividend March 1995 $32.00 $31.00 $0.20 June 1995 34.25 32.00 0.20 September 1995 36.50 34.25 0.20 October 1995 2% Stock Dividend December 1995 39.50 36.50 0.20 March 1996 40.00 39.50 0.20 June 1996 42.25 40.00 0.22 September 1996 44.50 42.25 0.22 October 1996 2% Stock Dividend December 1996 46.25 44.50 0.24 December 1996 2-for-1 Stock Split Line Graph Depicting Market Value and Book Value of Common Stock Market Book Value Value Year 1992 $8.00 $8.22 1993 $10.50 $8.90 1994 $14.75 $9.29 1995 $19.70 $10.33 1996 $23.13 $10.51 NOTE: Per share data is adjusted to reflect a 2:1 stock split in 1996 and 1994. INDEPENDENT AUDITOR'S REPORT Hill, Barth & King, Inc. Certified Public Accountants Park Place South, Suite 200 155 South Park Avenue Warren, Ohio 44481 Telephone (330) 394-3773 FAX (330) 395-3713 January 23, 1997 Board of Directors Farmers National Banc Corp. Canfield, Ohio Independent Auditors' Report We have audited the accompanying consolidated balance sheets of Farmers National Banc Corp. and subsidiary as of December 31, 1996 and 1995 and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended December 31, 1996. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Farmers National Banc Corp. and subsidiary as of December 31, 1996 and 1995 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Hill, Barth & King, Inc. Certified Public Accountants CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995 ASSETS Cash & due from banks $13,302,154 $14,766,117 Federal funds sold 5,667,000 14,630,000 TOTAL CASH AND CASH EQUIVALENTS 18,969,154 29,396,117 Securities available for sale - NOTE B 45,611,788 46,479,885 Other securities 1,467,650 852,900 Loans - NOTE C 266,702,323 232,159,670 Less allowance for credit losses - NOTE D 3,197,889 2,910,838 NET LOANS 263,504,434 229,248,832 Premises and equipment, net - NOTE E 5,697,598 5,563,232 Other assets 2,861,617 2,687,806 $338,112,241 $314,228,772 LIABILITIES AND STOCKHOLDERS EQUITY Deposits (all domestic): Noninterest-bearing $23,468,432 $23,586,312 Interest-bearing - NOTE F 260,342,434 244,368,461 TOTAL DEPOSITS 283,810,866 267,954,773 Short-term borrowings: U. S. Treasury interest-bearing demand note 622,129 748,470 Securities sold under repurchase agreements - NOTE G 15,748,622 9,847,119 Federal Home Loan Bank advances 1,400,000 0 TOTAL SHORT-TERM BORROWINGS 17,770,751 10,595,589 Other liabilities and deferred credits 1,721,635 1,702,145 TOTAL LIABILITIES 303,303,252 280,252,507 Commitments and contingent liabilities - NOTE H Stockholders Equity - NOTES I, J: Common Stock - no par value in 1996 and $2.50 par value per share in 1995; authorized 5,000,000 shares in 1996 and 2,400,000 in 1995; issued and outstanding 3,311,268 in 1996 and 1,644,559 in 1995. 24,253,806 4,111,398 Additional paid-in capital 0 16,059,118 Retained earnings 14,766,370 13,591,018 Unrealized appreciation on debt securities, net of applicable income taxes 108,191 214,731 Treasury stock, 164,544 shares at cost (4,319,378) 0 TOTAL STOCKHOLDERS EQUITY 34,808,989 33,976,265 $338,112,241 $314,228,772 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996 1995 1994 INTEREST INCOME Interest and fees on loans $21,519,178 $18,580,412 $16,911,283 Interest and dividends on securities: Taxable interest 2,256,701 2,154,188 2,141,376 Nontaxable interest 444,322 438,779 423,123 Dividends 94,782 25,987 20,527 Interest on federal funds sold 562,115 761,257 234,334 TOTAL INTEREST INCOME 24,877,098 21,960,623 19,730,643 INTEREST EXPENSE Deposits 10,117,809 9,199,760 7,694,588 Short-term borrowings 638,514 488,110 305,297 TOTAL INTEREST EXPENSE 10,756,323 9,687,870 7,999,885 NET INTEREST INCOME 14,120,775 12,272,753 11,730,758 Provision for credit losses 655,000 270,000 330,000 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 13,465,775 12,002,753 11,400,758 OTHER INCOME Service charges on deposit accounts 1,089,891 972,325 940,077 Investment security gains (losses) 0 (197) 88,327 Other operating income 388,258 370,261 329,179 TOTAL OTHER INCOME 1,478,149 1,342,389 1,357,583 14,943,924 13,345,142 12,758,341 OTHER EXPENSES Salaries and employee benefits - NOTE K 4,778,702 4,127,380 3,748,069 Net occupancy expense of premises 525,033 540,242 466,006 Furniture and equipment expense, including depreciation 520,610 463,097 540,810 State and local taxes 514,943 439,918 389,988 Other operating expenses 2,543,221 2,548,276 2,610,518 TOTAL OTHER EXPENSES 8,882,509 8,118,913 7,755,391 INCOME BEFORE FEDERAL INCOME TAXES 6,061,415 5,226,229 5,002,950 FEDERAL INCOME TAXES - NOTE L 1,930,000 1,650,000 1,579,000 NET INCOME $4,131,415 $3,576,229 $3,423,950 NET INCOME PER SHARE $1.22 $1.09 $1.09 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 1995 1994 COMMON STOCK Balance at beginning of year $4,111,398 $3,892,480 $3,652,140 33,729 shares issued as a 2% stock dividend in 1996, 31,956 in 1995 and 30,210 in 1994, including fractional shares. 1,500,940 79,890 75,525 59,618 shares sold in 1996, 55,611 in 1995 and 57,973 in 1994. 2,582,350 139,028 164,815 Transfer of additional paid-in capital to common stock 16,059,118 0 0 Balance at end of year 24,253,806 4,111,398 3,892,480 ADDITIONAL PAID-IN CAPITAL Balance at beginning of year 16,059,118 13,300,977 11,260,621 Excess proceeds over par value of shares sold in 1995 and 1994 1,735,549 1,360,631 Excess of fair value over par value of shares issued as stock dividends in 1995 and 1994, including fractional shares 1,022,592 679,725 Transfer of balance to common stock in 1996. (16,059,118) 0 0 Balance at end of year 0 16,059,118 13,300,977 RETAINED EARNINGS Balance at beginning of year 13,591,018 12,385,429 10,896,312 Net income 4,131,415 3,576,229 3,423,950 Dividends declared: $.88 cash dividends per share in 1996, $.80 in 1995 and $.98 in 1994. (1,455,123) (1,268,158) (1,179,583) Stock dividends (1,500,940) (1,102,482) (755,250) Balance at end of year 14,766,370 13,591,018 12,385,429 UNREALIZED APPRECIATION (DEPRECIATION) ON DEBT SECURITIES Balance at beginning of year 214,731 (663,619) 187,006 Net change in unrealized appreciation (depreciation) on debt securities, net of income taxes. (106,540) 878,350 (850,625) Balance at end of year 108,191 214,731 (663,619) TREASURY STOCK, AT COST Balance at beginning of year 0 0 0 Purchase of treasury stock (4,319,378) 0 0 Balance at end of year (4,319,378) 0 0 TOTAL STOCKHOLDERS EQUITY AT END OF YEAR $34,808,989 $33,976,265 $28,915,267 See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 1995 1994 CASH FLOW FROM OPERATING ACTIVITIES Interest received $25,979,036 $22,784,609 $20,697,876 Fees and commissions received 1,418,149 1,342,586 1,291,231 Interest paid (10,758,848) (9,399,584) (8,006,238) Cash paid to suppliers and employees (8,274,784) (7,779,200) (7,294,773) Income taxes paid (2,075,000) (1,685,000) (1,690,726) NET CASH PROVIDED BY OPERATING ACTIVITIES 6,288,553 5,263,411 4,997,370 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities available for sale 14,329,066 18,140,000 14,123,630 Proceeds from maturities of investment securities held to maturity 0 2,343,086 5,966,905 Proceeds from sales of investment securities available for sale 0 1,999,687 4,081,530 Purchases of other securities and securities available for sale (14,466,574) (18,114,267) (18,414,362) Purchases of investment securities held to maturity 0 (2,639,035) (4,041,914) Net increase in loans made to customers (35,031,303) (16,079,770) (14,615,389) Purchases of premises and equipment (545,977) (1,582,773) (343,288) Purchase of other real estate 0 0 (164,433) Proceeds from sale of other real estate 0 252,291 0 NET CASH USED IN INVESTING ACTIVITIES (35,714,788) (15,680,781) (13,407,321) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts (906,533) (3,148,523) 3,339,998 Net increase in time deposits 21,380,975 27,746,071 2,227,314 Net increase in Federal Home Loan Bank Borrowings 1,400,000 0 0 Purchase of Treasury Stock (4,319,378) 0 0 Dividends paid (1,138,142) (1,167,362) (999,957) Proceeds from sale of common stock 2,582,350 1,874,577 1,525,446 NET CASH PROVIDED BY FINANCING ACTIVITIES 18,999,272 25,304,763 6,092,801 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,426,963) 14,887,393 (2,317,150) CASH AND CASH EQUIVALENTS Beginning of year 29,396,117 14,508,724 16,825,874 End of year $18,969,154 $29,396,117 $14,508,724 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS Net income $4,131,415 $3,576,229 $3,423,950 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 394,384 379,012 379,224 Amortization and accretion 1,177,727 966,775 958,468 Provision for credit losses 655,000 270,000 330,000 (Gain) Loss on sale of investment securities 0 197 (88,327) Deferred income taxes (70,000) (12,636) (197,613) Other 27 83,834 191,668 NET CASH PROVIDED BY OPERATING ACTIVITIES $6,288,553 $5,263,411 $4,997,370 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS Supplemental schedule of noncash investing and financing activities: Unrealized loss on available for sale securities $48,228 $67,517 $1,005,950 Transfer of investment securities available for sale 0 4,663,982 0 Land exchanged for other borrowing 0 250,000 0 See accompanying notes to consolidated financial statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principals of Consolidation: The consolidated financial statements include the accounts of the company and its wholly-owned subsidiary, The Farmers' National Bank of Canfield. All significant intercompany balances and transactions have been eliminated. Nature of Operations: The company's wholly owned subsidiary, The Farmers National Bank of Canfield, operates under a national bank charter and provides full banking services. As a national bank, the Bank is subject to regulation of the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The area served by the Bank is the northeastern region of Ohio and service is provided at ten (10) locations. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Securities Available for Sale: Securities available for sale are carried at fair value. Fair value is based on market price if available. If market price is not available, fair value is based on broker quotations. Deferred income taxes are provided on any unrealized appreciation or decline in value. Such appreciation or decline in value, net of deferred taxes, is reflected as a separate component of stockholders equity. Gains and losses are determined using the specific identification method. The company does not utilize a trading account. Other Securities: Other securities include stock in the Federal Reserve Bank and the Federal Home Loan Bank and are recorded at amortized cost. Loans: Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest income is ordinarily discontinued when a loan becomes 90 days past due as to principal or interest; however, management may elect to continue the accrual when the estimated net realizable value of collateral is sufficient to cover the principal balance and the accrued interest. When interest accruals are discontinued, interest credited to income in the current year is reversed. When the loan is determined to be uncollectible, interest accrued in prior years and the principal are charged to the allowance for loan losses. This policy applies to the bank's installment, real estate and commercial and industrial loans. Loan Origination Fees and Costs: Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Impaired Loans: Impaired loans are classified according to the Financial Accounting Standards Board Statement 114, "Accounting by creditors for impairment of loans". Under this standard, the 1996 reserve for loan losses related to loans that are considered impaired would be based on discounted cash flows using the loan's initial effective interest rate and the fair value of the collateral for certain collateral dependent loans. At the present time, management did not have any loans it considers to be impaired. Allowance for Credit Losses: the allowance for credit losses represents the amounts which, in management's judgment, are adequate to absorb charge-offs, of existing loans which may become uncollectible. The allowance is based on management's judgment taking into consideration past loss experience, reviews of individual credits, current economic conditions and other factors considered relevant by management at the financial statement date. While management uses the best information available to establish the allowance, future adjustments to the allowance may be necessary, which may be material, if economic conditions differ substantially from the assumptions used in estimating the allowances. If additions to the original estimate of the allowance for credit losses are deemed necessary, they will be reported in earnings in the period in which they become reasonably estimable. Premises and Equipment: Premises and equipment are stated at cost. Depreciation is computed on the straight-line method. Income Taxes: Income taxes, based on filing a consolidated return with the company's subsidiary, are provided for amounts currently due and deferred amounts arising form temporary differences between the financial accounting and income tax basis of assets and liabilities. Deferred taxes are computed on the liability method as prescribed in Statement of Financial Accounting Standards (SFAS) no. 109, "Accounting for Income Taxes". Per Share Amounts: Earnings per share are based on weighted average shares outstanding. Average shares outstanding, per share amounts and reference to number of shares in notes to consolidated financial statements have been restated to give effect to stock dividends. Weighted average shares outstanding were 3,378,142 for 1996, 3,282,686 for 1995 and 3,152,900 for 1994. NOTE B - SECURITIES AVAILABLE FOR SALE Securities available for sale at December 31, 1996 and 1995 are summarized as follows:
1996 1995 U.S. Treasury and U.S. Government agencies $31,448,958 $31,691,768 Corporate debt securities 6,661,560 7,702,820 Obligations of states and political subdivisions 7,501,270 6,943,089 Collateralized mortgage obligations 0 142,208 TOTALS $45,611,788 $46,479,885
Net unrealized gains (losses) for securities available for sale at December 31, 1996 and 1995 are summarized below:
UNREALIZED UNREALIZED NET UNREALIZED December 31, 1996 GAINS LOSSES GAINS U.S. Treasury and U.S. Government agencies $82,250 ($36,892) $45,358 Corporate debt securities 41,705 (10,171) 31,534 Obligations of states and political subdivisions 88,200 (1,165) 87,035 TOTALS $212,155 ($48,228) $163,927 December 31, 1995 U.S. Treasury and U.S. Government agencies $208,710 ($53,309) $155,401 Corporate debt securities 59,924 (11,490) 48,434 Obligations of states and political subdivisions 120,542 (59) 120,483 Collateralized mortgage obligations 3,691 0 3,691 TOTALS $392,867 ($64,858) $328,009
The fair value and book value of securities available for sale by contractual maturities at December 31, 1996 are summarized below:
FAIR VALUE BOOK VALUE Due in 1 year or less $13,489,952 $13,463,410 Due after one year through five years 24,392,024 24,300,457 Due after five years through ten years 2,595,932 2,547,945 Due after ten years 5,133,880 5,136,049 TOTALS $45,611,788 $45,447,861
Securities with a carrying value of $30,100,000 at December 31, 1996 and $28,000,000 at December 31, 1995 were pledged to secure deposits in accordance with federal and state requirements and to secure repurchase agreements sold. NOTE C - LOANS Following is a summary of loans:
December 31, 1996 1995 Real Estate $105,026,533 $98,703,845 Installment 133,865,605 109,291,914 Commercial and Industrial 26,548,440 23,302,163 Subtotal 265,440,578 231,297,922 Net origination and deferred loan fees 1,261,745 861,748 TOTAL LOANS $266,702,323 $232,159,670 Nonperforming loans have not been separately classified because such loans are not material compared to total loans and nonaccrued interest is not material in relation to net income.
NOTE D - ALLOWANCE FOR CREDIT LOSSES Following is an analysis of changes in the allowance for credit losses for the years ended December 31:
1996 1995 1994 Balance at beginning of year $2,910,838 $2,746,420 $2,620,741 Additions: Provision for credit losses 655,000 270,000 330,000 Recoveries on loans previously charged off 184,098 170,879 183,050 TOTAL ADDITIONS 3,749,936 3,187,299 3,133,791 Credits charged off (552,047) (276,461) (387,371) Balance at end of year $3,197,889 $2,910,838 $2,746,420 The allowance for federal income tax purposes amounted to $752,962 at December 31, 1996, which is $2,444,927 less than the allowance for financial accounting purposes.
NOTE E - PREMISES AND EQUIPMENT Following is a summary of premises and equipment:
December 31, 1996 1995 Land $1,204,876 $1,180,876 Premises 4,987,755 4,780,574 Equipment 3,481,239 3,803,326 Leasehold Improvements 179,778 178,123 9,853,648 9,942,899 Less accumulated depreciation 4,156,050 4,379,667 NET BOOK VALUE $5,697,598 $5,563,232 Depreciation expense was $394,384 for the year ended December 31, 1996, $379,012 for 1995 and $379,224 for 1994.
NOTE F - INTEREST-BEARING DEPOSITS Following is a summary of scheduled maturities of certificates of deposit during the years following December 31, 1996: 1997 $69,703,188 1998 39,205,874 1999 4,953,892 2000 8,165,424 2001 and thereafter 9,071,049 TOTAL $131,099,427 Following is a summary of certificates of deposit of $100,000 or more by remaining maturities as of December 31, 1996: Three months or less $5,221,113 Three to six months 3,737,601 Six to twelve months 2,606,127 Over twelve months 10,864,346 TOTAL $22,429,187 NOTE G - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND UNUSED LINES OF CREDIT The bank subsidiary enters into sales of securities under repurchase agreements (reverse repurchase agreements). Securities underlying the agreements are U.S. Government securities with a book value including accrued interest of $16,925,491 for the year ended December 31, 1996 and $12,819,579 for 1995. The market value was $16,923,236 for 1996 and $12,829,848 for 1995. At December 31, 1996, these agreements had a weighted average interest rate of 4.55% and will mature January through March 1997. The securities, although held in safekeeping outside the bank subsidiary, were under the bank subsidiary's control. Securities sold under repurchase agreements averaged monthly $11,691,979 in 1996 and $9,498,008 in 1995. Maximum amounts outstanding at any month end during 1996 and 1995 were $15,748,622 and $11,849,736, respectively. The bank subsidiary has access to short term credit facilities at the Federal Home Loan Bank, which totaled $11,424,000 at December 31, 1996. At December 31, 1996, the total advances outstanding was $1,400,000, and was collateralized by a blanket pledge of residential mortgage loans. NOTE H - COMMITMENTS AND CREDIT RISK The bank subsidiary utilizes equipment and conducts certain of its branch operations under noncancelable operating leases extending to 1999. The building leases include options for renewal in five to ten year increments. Rental expense charged to operations totaled $125,129 for 1996, $120,750 for 1995 and $94,106 for 1994. Following is a summary of future minimum rental payments under operating leases that have initial or remaining noncancelable terms in excess of one year as of December 31, 1996: Year ending: December 31, 1997 $85,728 December 31, 1998 56,720 December 31, 1999 30,000 TOTAL $172,448 The bank subsidiary is required to maintain noninterest-bearing reserve balances with the Federal Reserve Bank. The average reserve balance was $6,165,000 for 1996. The bank subsidiary is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the bank subsidiary has in particular classes of financial instruments. The bank subsidiary's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The bank subsidiary uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. CONTRACT OR NOTIONAL AMOUNT Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $9,791,134 Standby letters of credit and financial guarantees written $ 237,203 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The bank subsidiary evaluates customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the bank subsidiary upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the bank subsidiary to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Most of the bank subsidiary's business activity is with a diversified customer base located within Mahoning and Columbiana Counties in Ohio. The concentrations of credit by type of loan are presented in Note C. NOTE I - STOCKHOLDERS EQUITY On March 28, 1996, the shareholders of the company approved a resolution which amended the company's Restated Articles of Incorporation to increase the number of authorized shares of common stock from 2,400,000 shares, par value $2.50, to 5,000,000 shares, without par value. The additional paid-in capital account has been combined with common stock as presented in the Consolidated Statements of Stockholders Equity. NOTE J - REGULATORY MATTERS The bank subsidiary, as a national bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. The Comptroller of the Currency must approve declaration of any dividends in excess of the sum of profits for the current year and retained net profits for the preceding two years (as defined). As of December 31, 1996, the bank subsidiary had $2,710,723 of retained earnings available for distribution and $11,203,930 not available for distribution to the company as dividends without prior approval of the Comptroller of the Currency. The bank subsidiary is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the bank subsidiary's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the bank subsidiary must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The bank subsidiary's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the bank subsidiary to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the bank subsidiary meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency categorized the bank subsidiary as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution's category. The following table reflects various measures of capital at year-end:
Requirement For Capital Actual Adequacy Purposes: Amount Ratio Amount Ratio As of December 31, 1996 Total Capital (to Risk-Weighted Assets) $37,199,000 15.34% $19,399,000 8.00% Tier I Capital (to Risk-Weighted Assets) $34,166,000 14.09% $9,700,000 4.00% Tier I Capital (to Average Assets) $34,166,000 10.18% $13,424,000 4.00% As of December 31, 1995 Total Capital (to Risk-Weighted Assets) $36,072,000 16.84% $17,141,000 8.00% Tier I Capital (to Risk-Weighted Assets) $33,391,000 15.58% $8,571,000 4.00% Tier I Capital (to Average Assets) $33,391,000 10.69% $12,496,000 4.00%
NOTE K - RETIREMENT PLANS The bank subsidiary has a noncontributory defined benefit pension plan covering substantially all employees. Normal retirement age is 65. Benefit payments for normal retirement are based on a percentage of employees' average monthly compensation during the last five years of employment. Funding of the plan, which is invested principally in domestic bank certificates of deposit, is based upon current service cost plus amortization of past service cost over 15 years. The company's funding policy is to generally contribute annually the maximum amount that can be deducted for federal income tax purposes. The company adopted a resolution on January 22, 1996 to terminate the defined benefit pension plan effective November 1, 1995. At December 31, 1996 the plan assets exceeded plan obligations by $65,645. Management's intent is to allocate this surplus to each qualified participant on a pro-rata basis. All plan assets will be distributed upon approval of the necessary authorities. Pension expense for the defined benefit plan was $17,295 in 1996, $156,253 in 1995 and $183,157 in 1994. In May, 1996, the company adopted a qualified 401(k) deferred compensation, noncontributory Retirement Savings Plan. All employees of the bank who have completed at least one year of service and meet certain other eligibility requirements are eligible to participate in the plan. Under the terms of the Plan, employees may voluntarily defer a portion of their annual compensation, not to exceed 15%, pursuant to section 401(k) of the Internal Revenue Code. The company matches a percentage of the participants' voluntary contributions up to 6% of gross wages. In addition, at the discretion of the Board of Directors, the company may make an additional profit sharing contribution to the plan. Company contributions to the 401(k) plan were $161,435 for the year ended December 31, 1996. The components of pension expense related to the defined benefit plan for the year ended December 31, 1995 are as follows: Service cost $132,605 Interest cost 134,030 Return on assets (39,659) Other (70,723) TOTAL $156,253 Following is the funded status of the plan as of December 31, 1995: Actuarial present value of benefit obligations: Vested benefit obligation $1,557,215 Accumulated benefit obligation $1,573,680 Projected benefit obligation ($2,119,606) Plan assets at fair value 1,738,082 Projected benefit obligation in excess of plan assets (381,524) Unrecognized transition gain (9,070) Unrecognized prior service cost (70,006) Unrecognized net loss 529,188 Prepaid pension cost $68,588 Assumptions used to develop the net periodic pension cost were: Assumed discount rate 6.25% Assumed rate of compensation increase 4.00% Expected rate of return on plan assets 6.25% NOTE L - FEDERAL INCOME TAXES The provision for income taxes (credit) consists of the following:
Years ended December 31 1996 1995 1994 Current $2,000,000 $1,662,636 $1,776,613 Deferred (70,000) (12,636) (197,613) TOTALS $1,930,000 $1,650,000 $1,579,000
Following is a reconciliation between federal income taxes at statutory rates and actual taxes based on income before federal income taxes:
Years ended December 31 1996 1995 1994 Percent of Percent of Percent of Amount pretax income Amount pretax income Amount pretax income Statutory tax $2,121,500 35% $1,829,180 35% $1,751,050 35% Effect of nontaxable interest (155,510) (3) (152,360) (3) (148,100) (3) Other (35,990) 0 (26,820) 0 (23,950) 0 ACTUAL TAX $1,930,000 32% $1,650,000 32% $1,579,000 32%
Deferred taxes (credit) result from certain temporary differences in the recognition of income and expenses for financial reporting and income tax purposes. The sources and tax effects of significant temporary differences are as follows:
Years ended December 31 1996 1995 1994 Depreciation $42,397 $17,176 $1,330 Provision for credit losses (97,597) (57,546) (137,931) Deferred loan fees and origination costs (13,496) 29,038 (59,708) Other (1,304) (1,304) (1,304) TOTALS ($70,000) ($12,636) ($197,613)
Deferred tax liabilities (assets) are comprised of the following at December 31:
Deferred tax asset: 1996 1995 Allowance for credit losses ($817,876) ($720,279) Deferred loan fee income (134,501) (169,733) Gross deferred tax assets (952,377) (890,012) Deferred tax liabilities: Depreciation 420,129 376,428 Prepaid loan origination costs 50,002 100,005 Mark-to-market adjustment - securities available for sale 55,734 110,619 Other 22,182 23,515 Gross deferred tax liabilities 548,047 610,567 ($404,330) ($279,445) No valuation allowance for deferred tax assets was recorded at December 31, 1996. Federal income taxes applicable to investment securities gains were $70 for 1995 and $30,100 for 1994.
NOTE M - LOANS TO RELATED PARTIES Certain directors, executive officers and associates of such persons were loan customers during 1996. Such loans were made in the ordinary course of business under normal credit terms and do not represent more that a normal risk of collection. Following is an analysis of the amount of loans in which the aggregate of the loans to any such person exceeded $60,000 during 1996: Total loans at December 31, 1995 $1,092,464 New loans 172,204 Repayments 201,143 Total loans at December 31, 1996 $1,063,525 NOTE N - DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 1996: Cash and cash equivalents: The carrying amounts in the consolidated balance sheets of cash and cash equivalents approximates their fair value. Investment securities: The fair value of securities available for sale equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: For certain homogeneous categories of loans, such as credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits: The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Securities sold under repurchase agreements: The carrying amount for securities sold under repurchase agreement approximates their fair value. Short term borrowings: The carrying amounts of short-term borrowings approximates their fair value. Commitments to extend credit, standby letters of credit and financial guarantees written: The fair value of commitments is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The estimated fair values of the company's financial instruments as of December 31, 1996 and 1995 are as follows:
1996 1995 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and cash equivalents $18,969,154 $18,969,154 $29,396,117 $29,396,117 Investment securities: Available for sale 45,611,788 45,859,357 46,479,885 46,601,970 Other securities 1,467,650 1,467,650 852,900 852,900 Loans - Net 263,504,434 263,590,306 229,248,832 229,711,573 TOTAL FINANCIAL ASSETS $329,553,026 $329,886,467 $305,977,734 $306,562,560 Financial liabilities: Deposits $283,810,866 $284,578,528 $267,954,773 $269,381,383 Securities sold under repurchase agreements 15,748,622 15,748,622 9,847,119 9,847,119 Short term borrowings 2,022,129 2,022,129 748,470 748,470 TOTAL FINANCIAL LIABILITIES $301,581,617 $302,349,279 $278,550,362 $279,976,972 Unrecognized financial instruments: Commitments to extend credit $9,791,134 $9,791,134 $9,868,007 $9,868,007 Standby letters of credit and financial guarantees 237,203 237,203 123,604 123,604
NOTE O - CONDENSED FINANCIAL INFORMATION Below is condensed financial information of Farmers National Banc Corp. (parent company only). In this information, the parent's investment in bank subsidiary is stated at cost plus equity in undistributed earnings of the subsidiary since acquisition. This information should be read in conjunction with the consolidated financial statements and related notes.
December 31, 1996 December 31, 1995 BALANCE SHEETS Assets: Cash $1,197,314 $692,398 Receivables 7,918 7,918 Investment in bank subsidiary 34,506,112 33,756,098 $35,711,344 $34,456,414 Liabilities: Accounts payable $1,010,546 $694,880 Stockholders equity: Common stock 24,253,806 4,111,398 Additional paid-in capital 0 16,059,118 Retained earnings 14,766,370 13,591,018 Treasury Stock (4,319,378) 0 TOTAL STOCKHOLDERS EQUITY 34,700,798 33,761,534 $35,711,344 $34,456,414
STATEMENTS OF INCOME Years ended December 31, 1996 December 31, 1995 December 31, 1994 Income: Equity in net income of subsidiary $4,194,441 $3,621,920 $3,472,068 Other expenses (63,026) (45,691) (48,118) NET INCOME $4,131,415 $3,576,229 $3,423,950 STATEMENTS OF CASH FLOWS Years ended December 31, 1996 December 31, 1995 December 31, 1994 Cash flows from operating activities: Net income $4,131,415 $3,576,229 $3,423,950 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in deferred director fees (1,316) (1,302) (1,233) Income from subsidiary (4,194,441) (3,621,920) (3,472,068) Dividends received from subsidiary 6,026,778 1,267,017 1,283,911 NET CASH PROVIDED BY OPERATING ACTIVITIES 5,962,436 1,220,024 1,234,560 Cash flows from investing activities: Investment in subsidiary (2,582,350) (1,874,575) (1,525,446) NET CASH USED IN INVESTING ACTIVITIES (2,582,350) (1,874,575) (1,525,446) Cash flows from financing activities: Purchase of Treasury Stock (4,319,378) 0 0 Dividends paid (1,138,142) (1,167,362) (999,957) Proceeds from sale of common stock 2,582,350 1,874,577 1,525,446 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,875,170) 707,215 525,489 NET INCREASE IN CASH 504,916 52,664 234,603 CASH Beginning of year 692,398 639,734 405,131 End of year $1,197,314 $692,398 $639,734 Cash dividends of $6,026,778, $1,267,017 and $1,283,911 were recevied from the bank subsidiary in 1996, 1995 and 1994, respectively.
INSIDE BACK COVER Drawing of Map of Ohio Highlighting Branch Locations MAIN OFFICE 20 S. Broad St., Canfield, OH 44406 533-3341 AUSTINTOWN 22 N. Niles-Canfield Rd. Youngstown, OH 44515 792-1411 COLONIAL PLAZA 401 E. Main St. Canfield, OH 44406 533-2686 CORNERSBURG 3619 S. Meridian Rd. Youngstown, OH 44511 793-3971 LAKE MILTON 17817 Mahoning Ave. Lake Milton, OH 44429 654-3351 SALEM 1858 E. State St. Salem, OH 44460 332-1558 WESTERN RESERVE 102 W. Western Reserve Rd. Youngstown, OH 44514 726-8896 COLUMBIANA 340 State Rt. 14 Columbiana, OH 44408 482-1974 LEETONIA 16 Walnut St. Leetonia, OH 44431 427-2436 DAMASCUS 29053 State Route 62 Damascus, OH 44619 537-4004 EX-27 3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000709337 FARMERS NATIONAL BANC CORP 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 13,302 0 5,667 0 45,612 1,468 1,468 266,702 3,198 338,112 283,811 17,771 1,722 0 0 0 24,254 10,555 338,112 21,519 3,358 0 24,877 10,118 10,756 14,121 655 0 8,883 6,061 6,061 0 0 4,131 1.22 1.22 8.13 0 2,098 0 0 2,911 552 184 3,198 3,198 0 0
EX-99 4 DEFINITIVE PROXY STATEMENT SCHEDULE 14A-INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14 INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No.) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12 Farmers National Banc Corp. (Name of Registrant as Specified in its Charter) (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] No fee required. [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11: 1. Title of each class of securities to which transaction applies: ................................................................. 2. Aggregate number of securities to which transaction applies: ................................................................. 3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): ................................................................. 4. Proposed maximum aggregate value of transaction: ................................................................. 5. Total fee paid: ................................................................. ........................... [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number or the Form or Schedule and the date of its filing. 1. Amount Previously Paid: ................................................................. 2. Form, Schedule or Registration Statement No.: ................................................................. 3. Filing Party: ................................................................. 4. Date Filed: ................................................................. (Amended by Exch Act Rel No.35113, eff 1/30/95) FARMERS NATIONAL BANC CORP. 20 SOUTH BROAD STREET CANFIELD, OHIO 44406 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON THURSDAY, MARCH 27, 1997 TO THE HOLDERS OF SHARES OF COMMON STOCK: NOTICE IS HEREBY GIVEN that pursuant to call of its Directors, the Annual Meeting of the Shareholders of FARMERS NATIONAL BANC CORP., Canfield, Ohio will be held at Colonial Catering located at 429 Lisbon Street, Canfield, Ohio 44406 on Thursday, March 27, 1997 at three-thirty o'clock (3:30) P.M., Eastern Standard Time, for the purpose of considering and voting upon the following matters: 1. ELECTION OF DIRECTORS. Fixing the number of Directors to be elected at eight (8) and the election of the eight (8) persons listed in the accompanying Proxy Statement. 2. TO TRANSACT SUCH OTHER BUSINESS as may properly come before the Meeting or any adjournment thereof. Shareholders of record at the close of business on February 28, 1997 are the only shareholders entitled to notice of and to vote at the Annual Shareholders Meeting. By Order of the Board of Directors Frank L. Paden, President & Secretary Canfield, Ohio March 6, 1997 IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE. FARMERS NATIONAL BANC CORP. CANFIELD, OHIO 44406 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS MARCH 27, 1997 Farmers National Banc Corp., herein referred to as "Farmers" or the "Corporation" is furnishing this Proxy Statement to its shareholders in connection with the solicitation, by order of the Board of Directors of Farmers, of proxies to be used at the Annual Meeting of Shareholders to be held on Thursday, March 27, 1997 at 3:30 P.M., Eastern Standard Time, at Colonial Catering, 429 Lisbon Street, Canfield, Ohio 44406, and at any adjournments thereof. The Corporation is a one-bank holding company of which The Farmers National Bank of Canfield is the wholly owned subsidiary. The cost for solicitation of proxies will be borne by Farmers. Brokerage firms and other custodians, nominees and fiduciaries may be requested to forward soliciting material to their principals and to obtain authorization for the execution of proxies. Farmers will, upon request, reimburse brokerage firms, and other custodians, nominees and fiduciaries for the execution of proxies and for their expenses in forwarding proxy material to their principals. The proxy statements and the form of proxy are being mailed on March 6, 1997 or as soon thereafter as practicable to all shareholders entitled to vote at the meeting. In addition to use of mails, proxies may be solicited by officers, directors, and employees of Farmers by personal interview, telephone and telegraph. VOTING RIGHTS Only shareholders of record at the close of business on February 28, 1997 will be entitled to vote at the meeting. As of February 28, 1997, Farmers had issued and outstanding 3,311,268 shares of common stock with no par value. Each outstanding share entitles the recordholder to one vote. The number of shares present at the meeting in person or by proxy will constitute a quorum for the transaction of business. It is important that your stock be represented at the meeting, regardless of the number of shares you may own. We would appreciate your signing and returning the enclosed proxy. The shares represented by each proxy, which is properly executed and returned to Farmers, will be voted in the manner described in this proxy statement and the proxy. In the absence of instructions, the proxy will be voted "For" the election of the eight (8) persons listed in this Proxy Statement. The proxy may be revoked at any time prior to its exercise, by delivering notice of revocation or a duly executed proxy bearing a later date to the Treasurer of the Corporation at any time before the proxy is voted. Shareholders who attend the meeting in person may vote their stock even though they may have sent in a proxy. No officer or employee of Farmers may be named as a proxy. If you received two or more proxy forms because of difference in addresses or registration of shareholdings, each should be executed and returned in order to assure a complete tabulation of shares. The corporation will appoint two officers to act as inspectors for purposed of tabulating the votes cast by proxy. Broker non-votes and abstentions are not treated as votes cast for purposes of any of the matters to be voted on at the meeting. ELECTION OF DIRECTORS Pursuant to the Code of Regulations, the authorized number of directors of Farmers has been set at eight (8). The Board of Directors has nominated the eight (8) persons named below to serve as directors until the next Annual Meeting or until their earlier death, resignation or removal from office. Each of the eight (8) nominees is presently a member of the Board of Directors and has consented to serve another term as director if re-elected. If any of the nominees should be unavailable to serve for any reason (which is not anticipated), the Board of Directors may designate a substitute nominee or nominees (in which case the persons named on the enclosed proxy card will vote all valid proxy cards for the election of such substitute nominee or nominees), allow the vacancy or vacancies to remain open until a suitable candidate or candidates are located, or by resolution provide for a lesser number of directors. INFORMATION WITH RESPECT TO NOMINEES Certain information in the following tabulation has been furnished to Farmers by the respective nominees for director. Principal Occupation and Director Name Five Year Business Experience Age Since (A) Benjamin R. Brown President and Owner, Castruction 51 1991 Company, Incorporated in 1965 - designs and manufactures pre-cast shapes and associated products for the steel industry. Richard L. Calvin Vice Chairman since 1996, formerly, 70 1975 Executive Vice President/Cashier of Farmers National Bank since 1972 and Executive Vice President/ Treasurer of Farmers National Banc Corp. since 1983. Joseph O. Lane President and Owner - Lane Funeral 72 1965 Homes, Inc. since 1950, Lane Life Paramedics, Inc. and Lane Monument Co. - operates three funeral homes , an EMT and ambulance service. David C. Myers President and Owner - Myers Equipment 68 1988 Corp. since 1955 - sales of truck equipment and school buses. Mr. Myers operates a 2,000 acre farm since 1946. Edward A. Ort President of Ort Furniture Mfg. Co. 67 1993 since 1973 - manufacture of upholstered furniture which is shipped to retail furniture stores in northeastern United States since 1957. Frank L. Paden President & CEO of Farmers National 45 1992 Bank since 1996. EVP/Sr. Loan Officer since 1991. President & Secretary of Farmers National Banc Corp. since 1996. William D. Stewart Chairman since 1996. Formally, 67 1972 President of Farmers National Bank since 1972 and President & Secretary of Farmers National Banc Corp. since 1983. Ronald V. Wertz President and Owner of Boyer 49 1989 Insurance Inc. since 1981 - provides risk management analysis and policies for individuals, families and business insurance plans, including property, liability, health, life and bonding. (A) Includes the period served as a director of The Farmers National Bank of Canfield prior to its reorganization into a wholly owned subsidiary of this Corporation. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and executive officers, and persons who own more than 10% of a registered class of the Corporation's equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Corporation. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based solely on a review of the copies of such reports furnished to the Corporation and written representations that no other reports were required, during 1996, all Section 16(a) filing requirements applicable to its officers, directors and greater that 10% beneficial owners were complied with. SECURITY OWNERSHIP OF MANAGEMENT The following tables sets forth information regarding beneficial ownership as of December 31, 1996, of the Corporation's common shares of each Director and all Executive Officers as a group. Name Aggregate Number of Percent of Shares Beneficially Outstanding Owned (A) Shares Benjamin R. Brown 27,398 .83% Richard L. Calvin 37,574 1.13% Joseph O. Lane 80,282 2.42% David C. Myers 24,860 .75% Edward A. Ort 6,238 .19% Frank L. Paden 8,090 .24% William D. Stewart 30,266 .91% Ronald V. Wertz 24,614 .74% Executive Officers as a Group 3,214 .10% Total 242,536 7.32% (A) Beneficial Ownership includes those shares over which an individual has sole or shared voting, or investment purposes such as beneficial interest of a spouse, minor children, or other relatives living in the home of the named individual, trusts, estates and certain affiliated companies. COMMITTEES OF THE BOARD OF DIRECTORS At the Directors' organizational meeting, held immediately following the last annual shareholders' meeting of The Farmers National Banc Corp. held on March 28, 1996, the following committees were appointed by the Chairman: EXECUTIVE COMPENSATION AND EMPLOYEES SALARY COMMITTEE: Joseph O. Lane, Chairman; Benjamin R. Brown, David C. Myers, Edward A. Ort, and Ronald V. Wertz. The Executive Compensation and Employees Salary Committee reviews the compensation of the official staff and makes recommendations regarding all employee benefits to the Board of Directors. This committee met one time in 1996. AUDIT & EXAMINING COMMITTEE: David C. Myers, Chairman; Benjamin R. Brown, Edward A. Ort, and Ronald V. Wertz. The Audit and Examining Committee directs the activities of the internal audit staff, reviews the internal auditor's reports, reviews all examinations of the Comptroller of the Currency and makes recommendations to the Board regarding the engagement of an external auditing firm to perform the annual audit and prepare income tax returns. This committee met four times in 1996. DISCOUNT LOAN COMMITTEE: Frank L. Paden, Chairman; Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, William D. Stewart, and Ronald V. Wertz. The Discount Loan Committee meets weekly to review all loans made during the previous week and to approve all loan commitments which are either above the assigned lending limits of the loan officers or are not in keeping with existing bank policy. BUILDING COMMITTEE: Richard L. Calvin, Chairman; Ad Hoc. The Building Committee oversees site selection, office additions and modifications. This committee did not specifically meet in 1996, however, the chairman did report to the directors at other meetings. LONG RANGE AND STRATEGIC PLANNING COMMITTEE: Frank L. Paden, Chairman; Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, William D. Stewart, and Ronald V. Wertz. The Long Range and Strategic Planning Committee is responsible for formulation and implementation of the Strategic Plan for the operation of the Corporation. This committee met twice in 1996. NOMINATING COMMITTEE: Frank L. Paden, Chairman; Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, William D. Stewart, and Ronald V. Wertz. The Nominating Committee makes decisions with respect to: (a) nominees for election as director at the annual meeting of shareholders; (b) nominees to fill Board vacancies between annual meetings; and (c) the composition of membership of the various other standing committees. This committee did not meet in 1996. RISK MANAGEMENT AND INSURANCE COMMITTEE: Ronald V. Wertz, Chairman; Benjamin R. Brown, Richard L. Calvin, and Carl D. Culp, EVP/Cashier/CFO. The Risk Management and Insurance Committee is responsible for reviewing coverage and protection levels of insurance maintained by the Bank. The committee met once in 1996. During 1996, each director standing for re-election, was present for more that 75% of the combined number of meetings of the Board of Directors and of each committee of the Board on which such director served. There were twelve regular and ten special meetings of the Board of Directors in 1996. Members of the Board of Directors receive $350.00 for each board meeting they attend, and $250.00 for each committee meeting they attend with the exception of inside directors who receive no compensation for committee meetings. NOTE: THE ABOVE COMMITTEES ARE COMMITTEES OF THE FARMERS NATIONAL BANK OF CANFIELD (THE BANK), A WHOLLY OWNED SUBSIDIARY OF FARMERS NATIONAL BANC CORP. CURRENTLY, THE MEMBERS OF FARMERS' BOARD OF DIRECTORS ALSO SERVE AS THE DIRECTORS OF THE BANK, AND ATTEND BOARD MEETINGS FOR BOTH FARMERS AND THE BANK. ALTHOUGH THESE MEETINGS ARE CONDUCTED SEPARATELY ON THE SAME DAY, A MEMBER RECEIVES COMPENSATION (WHICH IS PAID BY FARMERS) FOR ONLY ONE MEETING, CONSEQUENTLY, MEMBERS ATTENDING A MEETING OF THE BOARDS OF BOTH FARMERS AND THE BANK ON A SINGLE DAY ARE CREDITED WITH ONE BOARD MEETING FOR ATTENDANCE AND COMPENSATION PURPOSES. RETIREMENT PENSION PLAN The Corporation previously maintained a tax qualified Defined Benefit Plan for the benefit of all eligible employees, including all executive officers. This plan is identified as "The Farmers National Bank of Canfield Salaried Employees Pension Plan". Due to a change in the demographics of the employee census and taking advantage of fixing future retirement benefit expenses, the Corporation elected to freeze this plan as of November 1, 1995, in accordance with the decision to ultimately terminate this Pension Plan. This Defined Benefit Plan is funded entirely by the Corporation. At the time of application for termination, the Plan assets were adequate to fund all the Plan liabilities. Upon approval from the necessary authorities, all assets will be distributed to the Plan participants. None of the assets of the Plan will revert back to the Corporation and the Corporation will not have any additional liability in connection with this Defined Benefit Plan. In May 1996, the Corporation adopted a 401(k) Profit Sharing Retirement Savings Plan. All employees of Farmers National Bank who have completed at least one year of service and meet certain other eligibility requirements are eligible to participate in the Plan. Under the terms of the Plan, employees may voluntarily defer a portion of their annual compensation, not to exceed 15%, pursuant to section 401(k) of the Internal Revenue code. The Corporation matches a percentage of the participants' voluntary contributions up to 6% of gross wages. In addition, at the discretion of the Board of Directors, the Corporation may make an additional profit sharing contribution to Plan. The Corporation's contributions are subject to a vesting schedule and the Plan meets the requirements of Section 401(a) of the Internal Revenue Code and Department of Labor Regulations under ERISA. SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Salary Bonus 401(k) All Other and Director Corporation Compensation Fees (a) Contribution (b) William D. Stewart, Chairman 1996 129,543 0 7,126 3,382 1995 118,727 2,000 0 3,861 1994 107,950 2,000 0 1,505 Frank L. Paden, President & CEO 1996 86,318 0 4,749 1,038 1995 75,883 2,000 0 659 1994 71,380 2,000 0 887 (a) The amount of Director Fees included in this annual amount is as follows: Stewart ($8,250, $6,700 and $5,800) and Paden ($8,250, $6,700 and $5,800). (b) Amounts represent cost of group term life insurance and other benefits.
Listed is the total compensation paid by the Corporation's subsidiary, The Farmers National Bank of Canfield during the latest fiscal year to the named person(s) for services in all capacities, specifically setting forth the direct compensation to the Chairman and President & CEO. No other executive officer of Farmers receives the total annual salary and bonus in excess of $100,000. In 1991, as a result of certain changes in the Internal Revenue Code, the Bank's pension plan was amended to reduce significantly the benefits of several key employees, including those of Stewart and Paden. As a result, the Bank has entered into Deferred Compensation Agreements with certain of its executive officers, including Stewart and Paden. Under the terms of the Deferred Compensation Agreement, they will receive monthly payments of $1,665.00 (Stewart) and $930.00 (Paden) for a period of two hundred and four (204) months, commencing with retirement age of 65. This agreement also provides that these executive officers will be available to perform consulting services for the Bank during the period he is receiving these payments, and prohibits him from entering into competition with the Corporation during that same period. In the event that any payments should still remain due and payable to the executive officer under the Agreement at the time of his death, those payments would be made to his surviving spouse. In the event that any payment should still remain due and payable to either the executive officer or his spouse under the Agreement at the death of the survivor of them, those payments would be reduced to their then present value at a predetermined rate of interest and paid to the estate of the survivor in a lump sum. Payments will be prorated in the event the employee retires before the age of 65, and will be increased proportionately if he retires after the age of 65. The Agreement is funded by a life insurance policy owned by the bank, on which the Bank is the beneficiary and the premiums of which are paid by the Bank. NOTE: Tables containing disclosures of Stock Appreciation Rights and Plans and Long Term Incentive Plans have been omitted because no such programs exist for either Farmers National Banc Corp. or The Farmers National Bank of Canfield. No Employment Contracts or Golden Parachute Agreements exist between any executive officer and either Farmers National Banc Corp. or The Farmers National Bank of Canfield. INDEBTEDNESS OF MANAGEMENT Farmers has had, and expects to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their associates on the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with others. Since the beginning of 1996, the largest aggregate extensions of credit to officers, directors and their associates during the year ended December 31, 1996 was $1,245,724 or 3.58% of Equity Capital Accounts. In the opinion of the management of Farmers, these transactions do not involve more than a normal risk of collectability or present other unfavorable features. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors is made up of all of the outside directors of Farmers. No officers of the corporation sit on this committee. This committee reports back to the full board but its' decisions are not subject to full board approval. The committee has the purpose and responsibility of providing the Bank, its staff and the communities it serves with consistent long-term leadership of the highest quality possible while protecting the interests of the shareholders. The committee sets the limits for increases in the aggregate for all staff, reviews performance of executive officers and sets their salaries for the coming year. In addition, any incentive/bonus program is set by the board based on the recommendation of the compensation committee. The committee takes a straightforward approach to the review of executives and bases its consideration of salaries on specific job performance, contribution to target levels of growth, profitability, stability, capital and return on equity (ROE) and return on assets (ROA). Also considered is the executive's contribution to the general success of the Bank and its business plan and community standing, which cannot necessarily be quantified in an appropriated manner but is weighted heavily in a community bank, which is located exclusively in small communities. Successful bank operations are contingent upon accomplishment in all areas and integration with the business community's direction and success in our market areas. Executive performance must therefore be evaluated by using these factors as well. Specific results of each executive's area of responsibility are evaluated and considered, but would not be appropriately discussed here as a matter of confidentiality. The committee evaluates the President on the same basis as other executive offices with weight being given to the achievement of target levels of growth, capital and return on equity and, in addition, specific target goals of the overall strategic plan of the Bank. The accomplishment of meeting the goals and targets are reflected in the Summary Compensation Table. The members of the Compensation Committee are Joseph O. Lane, Chairman; Benjamin R. Brown, David C. Myers, Edward A. Ort and Ronald V. Wertz. None has registered a disagreement with the above report. Compensation Committee Interlocks and Insider Participation No member of the Compensation Committee is currently or was at any time during 1996, an officer or an employee of, or had an employment agreement with the Corporation or the Bank. No corporate or committee interlocks exist which require disclosure under SEC regulations. PERFORMANCE GRAPH The Securities and Exchange Commission requires a line graph comparing the cumulative annual shareholders return of the Corporation, over a five year period against an overall stock market index and an industry index, as presented below. The per share price for each quarter, which is the price for each quarterly dividend and is used in the calculations of this graph, is established by the stock's market maker, Butler Wick and Company of Youngstown, Ohio. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN * AMONG FARMERS NATIONAL BANC CORP., THE NASDAQ STOCK MARKET - US INDEX AND THE NASDAQ BANKS INDEX [PERFORMANCE GRAPH PAPER COPY MAILED TO SEC] TOTAL RETURN GRAPH DATA At December 31 1991 1992 1993 1994 1995 1996 Farmers National Banc Corp. 100 131 182 238 350 459 NASDAQ Stock Mkt-US 100 116 134 131 185 227 NASDAQ Bank 100 146 166 165 246 326 RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors has elected Hill, Barth and King to serve as the corporation's independent public accountant for the fiscal year ending December 31, 1997. Hill, Barth and King also served as the corporation's independent public accountant for the fiscal year ended December 31, 1996. Hill, Barth and King is expected to have a representative present at the annual meeting and will be available to respond to shareholders' questions and if they desire, will have an opportunity to make any statement they consider appropriate. The 1996 Annual Report, including the required audited financial statements of the Corporation and related financial information, is enclosed with this proxy soliciting material. SHAREHOLDER PROPOSALS Any Shareholder proposal intended to be placed in the Proxy Statement for the 1997 annual meeting to be held in March 1998 must be received by the Corporation no later than December 1, 1997. Written proposals should be sent to Carl D. Culp, Executive Vice President and Treasurer, Farmers National Banc Corp., 20 South Broad Street, P.O. Box 555, Canfield, Ohio 44406. Each proposal submitted should be accompanied by the name and address of the shareholder submitting the proposal and the number of shares owned. If the proponent is not a shareholder of record, proof of beneficial ownership should also be submitted. All proposals must be a proper subject for action and comply with the proxy rules of the Securities and Exchange Commission. MISCELLANEOUS The Board of Directors does not know of matters other than the review of 1996 and the election of Directors to be acted upon at the annual meeting. If any other matters should come before the meeting, the proxy holders will vote upon them in accordance with their best judgment. A copy of the Corporation's 1996 report filed with the Securities and Exchange Commission, on Form 10-K, will be available without charge to shareholders upon written request to Carl D. Culp, Executive Vice President and Treasurer, Farmers National Banc Corp., 20 South Broad Street, P.O. Box 555, Canfield, Ohio 44406. BY ORDER OF THE BOARD OF DIRECTORS FRANK L. PADEN, PRESIDENT & SECRETARY FARMERS NATIONAL BANC CORP. 20 South Broad St., P.O. Box 555, Canfield, Ohio 44406 PROXY FOR ANNUAL MEETING SOLICITED BY THE BOARD OF DIRECTORS KNOW ALL MEN BY THESE PRESENT, that I, the Undersigned Shareholder of Farmers National Banc Corp. of Canfield, Ohio, do hereby nominate and appoint William D. Calhoun, Ronald V. Wertz and David W. Yeany (no officer or employee of the Corporation may be named as proxy) or any one of them (with full power to act alone), my true and lawful attorney(s) with full owner of substitution, for me and in my name, place and stead to vote all the Common Stock of said Corporation standing in my name on its books on February 28, 1997, at the annual meeting of its Shareholders to be held at Colonial Catering, 429 Lisbon Street, Canfield, Ohio 44406, on Thursday, March 27, 1997, at 3:30 P.M., Eastern Standard Time, or any adjournment thereof with all the powers the undersigned would possess if personally present as follows: 1. ELECTION OF DIRECTORS: Fixing the number of Directors to be elected at eight (8) and the election of the eight (8) persons listed in the Proxy Statement dated March 6, 1997 accompanying the notice of said meeting. FOR (all nominees except as indicated below) ______ WITHHOLD AUTHORITY (as to all nominees) _____ To withhold your vote from certain nominees, strike a line through their name. Benjamin R. Brown, Richard L. Calvin, Joseph O. Lane, David C. Myers, Edward A. Ort, Frank L. Paden, William D. Stewart, Ronald V. Wertz 2. SUCH OTHER BUSINESS as may properly come before the meeting or any adjournment thereof. THIS PROXY CONFERS AUTHORITY TO VOTE "FOR" EACH PROPOSITION LISTED UNLESS OTHERWISE INDICATED. If any other business is presented at said meeting, this Proxy shall be voted in accordance with the recommendations of The Board of Directors. The Board of Directors recommends a vote "For" each of the listed propositions. This proxy is solicited on behalf of The Board of Directors and may be revoked prior to its exercise. WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE (whether or not you plan to attend the meeting in person). IF YOU DO ATTEND THE MEETING, YOU MAY THEN WITHDRAW YOUR PROXY. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE. DATED ________________________________________ NUMBER OF SHARES HELD_________________________ _______________________________________________ _______________________________________________ Signature of Shareholder(s) * *When signing as attorney, executor, administrator, trustee or guardian, please give full title. If more than one trustee, all should sign. All joint others must sign. -----END PRIVACY-ENHANCED MESSAGE-----