Farmers National Banc (FMNB) 10-Q 2002 Q2 Quarterly report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Quarter ended June 30, 2002 Commission file number 2-80339

FARMERS NATIONAL BANC CORP.(Exact name of registrant as specified in its charter)

OHIO	34-1371693
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No)
20 South Broad Street Canfield, OH 44406	44406
(Address of principal executive offices)	(Zip Code

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

Not applicable
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      X        No            

Indicate the number of shares outstanding of each of the issuer’s classes or common stock, as of the latest practicable date.

Class	Outstanding at July 31, 2002
Common Stock, No Par Value	12,108,616 shares

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II — OTHER INFORMATION
SIGNATURES
EX-99.1 Certification Letter
EX-99.2 Certification Letter

PART I — FINANCIAL INFORMATION

Item 1.Financial Statements			Page
Included in Part I of this report:
	Farmers National Banc Corp. and Subsidiary
		Consolidated Balance Sheets		1
		Consolidated Statements of Income and Comprehensive Income		2
		Consolidated Statements of Cash Flows		3
	Notes to Consolidated Financial Statements			4
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations				5-9
Item 3.Quantitative and Qualitative Disclosures About Market Risk				10
PART II — OTHER INFORMATION
Other Information and Signatures				10-12

CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

					(In Thousands of Dollars)
					June 30,			December 31,
					2002			2001
ASSETS
Cash and due from banks					$	25,544		$	23,871
Federal funds sold						20,337			41,542
				TOTAL CASH AND CASH EQUIVALENTS		45,881			65,413
Securities available for sale						191,130			143,575
Loans						449,248			435,470
Less allowance for credit losses						6,603			6,442
				NET LOANS		442,645			429,028
Premises and equipment, net						12,963			13,009
Other assets						5,633			5,669
					$	698,252		$	656,694
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (all domestic):
		Noninterest-bearing			$	49,279		$	52,754
			Interest-bearing			486,446			450,890
				TOTAL DEPOSITS		535,725			503,644
U. S. Treasury interest-bearing demand note						796			141
Securities sold under repurchase agreements						57,416			47,444
Federal Home Loan Bank advances						24,884			26,832
Other liabilities and deferred credits						2,582			2,915
				TOTAL LIABILITIES		621,403			580,976
Stockholders Equity:
	Common Stock — Authorized 25,000,000 shares; issued and outstanding 12,131,371 in 2002 and 12,111,331 in 2001					57,330			55,419
	Retained earnings					20,709			20,672
	Accumulated other comprehensive income					2,599			1,741
	Treasury stock, at cost; 323,094 shares in 2002 and 176,351 in 2001					(3,789	)		(2,114	)
				TOTAL STOCKHOLDERS EQUITY		76,849			75,718
					$	698,252		$	656,694

1

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

					(In Thousands except Per Share Data)
					For the Three Months Ended				For the Six Months Ended
					June 30,		June 30,		June 30,		June 30,
					2002		2001		2002		2001
INTEREST INCOME
Interest and fees on loans					$	8,722	$	9,371	$	17,353	$	18,790
Interest and dividends on securities:
		Taxable interest				1,482		1,409		2,774		2,786
		Nontaxable interest				359		316		710		602
		Dividends				173		222		377		458
		Interest on federal funds sold				200		261		388		434
				TOTAL INTEREST INCOME		10,936		11,579		21,602		23,070
INTEREST EXPENSE
Deposits						3,760		4,464		7,561		8,956
Borrowings						792		858		1,602		1,913
				TOTAL INTEREST EXPENSE		4,552		5,322		9,163		10,869
				NET INTEREST INCOME		6,384		6,257		12,439		12,201
Provision for credit losses						270		270		540		540
				NET INTEREST INCOME AFTER
				PROVISION FOR CREDIT LOSSES		6,114		5,987		11,899		11,661
OTHER INCOME
Service charges on deposit accounts						436		549		880		1,026
Investment security gains						117		17		153		25
Other operating income						248		317		541		553
				TOTAL OTHER INCOME		801		883		1,574		1,604
OTHER EXPENSES
Salaries and employee benefits						2,369		2,197		4,729		4,379
Net occupancy expense of premises						264		255		529		529
Furniture and equipment expense, including depreciation						299		292		624		587
Intangible and other taxes						211		212		410		427
Other operating expenses						1,225		1,187		2,398		2,247
				TOTAL OTHER EXPENSES		4,368		4,143		8,690		8,169
			INCOME BEFORE FEDERAL INCOME TAXES			2,547		2,727		4,783		5,096
FEDERAL INCOME TAXES						735		805		1,368		1,493
				NET INCOME	$	1,812	$	1,922	$	3,415	$	3,603
OTHER COMPREHENSIVE INCOME, NET OF TAX:
	Unrealized gains on securities					1,353		101		858		1,062
				COMPREHENSIVE INCOME	$	3,165	$	2,023	$	4,273	$	4,665
* NET INCOME PER SHARE					$	0.15	$	0.16	$	0.28	$	0.30

*     Restated to reflect weighted average shares outstanding.

2

CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

					(In Thousands of Dollars)
					Six Months Ended
					June 30,			June 30,
					2002			2001
CASH FLOW FROM OPERATING ACTIVITIES
	Interest received				$	22,023		$	24,060
	Fees and commissions received					1,421			1,568
	Interest paid					(9,605	)		(11,039	)
	Cash paid to suppliers and employees					(8,452	)		(8,185	)
	Income taxes paid					(789	)		(1,529	)
			NET CASH PROVIDED BY OPERATING ACTIVITIES			4,598			4,875
CASH FLOWS FROM INVESTING ACTIVITIES
	Decrease in interest-bearing time deposits maturing in more than 90 days					0			99
	Proceeds from maturities and repayments of securities available for sale					14,206			14,975
	Proceeds from sales of securities available for sale					1,411			6,050
	Purchases of securities available for sale					(62,109	)		(25,187	)
	Net decrease (increase) in loans made to customers					(14,804	)		8,410
	Purchases of premises and equipment					(422	)		(352	)
			NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES			(61,718	)		3,995
CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in deposits					32,122			19,923
	Net increase (decrease) in short-term borrowings					10,597			(356	)
	Net decrease in Federal Home Loan Bank borrowings					(1,948	)		(17,743	)
	Purchase of Treasury Stock					(1,675	)		0
	Dividends paid					(3,419	)		(3,123	)
	Proceeds from sale of common stock					1,911			1,596
			NET CASH PROVIDED BY FINANCING ACTIVITIES			37,588			297
			NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(19,532	)		9,167
CASH AND CASH EQUIVALENTS
	Beginning of period					65,413			34,708
	End of period				$	45,881		$	43,875
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
	Net income				$	3,415		$	3,603
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation				421			376
		Amortization and accretion				1,070			1,025
		Provision for credit losses				540			540
		Gain on sale of investment securities				(153	)		(25	)
		Other				(695	)		(644	)
				NET CASH PROVIDED BY OPERATING ACTIVITIES	$	4,598		$	4,875

3

FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management Representation:

     The financial statements for June 30, 2002 and 2001 have been prepared by management without audit and, therefore, have not been certified by our Independent Certified Public Accountants.

     In the opinion of the management of the registrant, the accompanying consolidated financial statements for the six month period ending June 30, 2002 and 2001 include all adjustments, consisting of only normal recurring adjustments necessary for a fair statement of the results for the periods.

		(In Thousands of Dollars)
		Six Months Ended
		June 30, 2002
Stockholders Equity
Common Stock
	Balance 1/1/02		55,419
	166,783 shares sold		1,911
	Balance 6/30/02		57,330
Retained Earnings
	Balance 1/1/02		20,672
	Net Income		3,415
	Dividends Declared: $.28 Cash dividends on common stock		(3,378	)
	Balance 6/30/02		20,709
Accumulated Other Comprehensive Income
	Balance 1/1/02		1,741
	Net change in unrealized appreciation on available for sale securities, net of income taxes		858
	Balance 6/30/02		2,599
Treasury Stock, At Cost
Balance 1/1/02			(2,114	)
Shares Purchased			(1,675	)
Balance 6/30/02			(3,789	)
Total Stockholders Equity at 6/30/02			76,849

4

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

     The following financial review presents an analysis of the assets and liability structure of the Corporation and a discussion of the results of operations for each of the periods presented in this quarterly report of liquidity, capital and credit quality. Certain statements in this report that relate to Farmers National Banc Corp.’s plans, objectives, or future performance may be deemed to be forward-looking statements within the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties.

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

Results of Operations

     The Corporation’s net income for the first six months of 2002 was $3.415 million, or $.28 per share, which is a 5.2% decrease compared with the $3.603 million, or $.30 per share earned during the same period last year. Return on average assets and return on average equity for the first six months of 2002 were 1.07% and 9.87% respectively, compared to 1.15% and 10.05% for the same period in 2001.

     The decrease in net income for the first six months of 2002 was the result of an increase in non-interest operating expenses and the narrowing of margins. Net interest income increased slightly while total other expenses increased $521 thousand or 6.4% compared to last year. As average loan balances decreased 1.33% over the past twelve months, loan yields also decreased from 8.05% in 2001 to 7.40% in 2002. This combination of decreasing balances and declining yields dropped loan income by $1.437 million or 7.65%. Although the average balance of securities and federal funds sold increased 32.59%, this increase was partially offset by a drop in its’ yield from 6.36% in 2001 to 4.82% in 2002.

     Interest expense on deposits and borrowings dropped $1.706 million or 15.70% over the same time period. During 2002, average deposits increased $37.511 million or 7.84% while the rates paid on deposits decreased from 3.77% in 2001 to 2.95% in 2002. The net effect of these rate and volume changes was a decrease in deposit interest expense of $1.395 million or 15.58%. Borrowing expense decreased $311 thousand or 16.26% compared to last year. This decrease is primarily the result of lower borrowing rates declining from 5.30% in 2001 to 4.10% in 2002.

     In 2002, investment security gains amounted to $153 thousand, compared to $25 thousand in 2001. Total other expenses increased from $8.169 million in 2001 to $8.690 million in 2002. Salaries and employee benefits increased $350 thousand or 7.99% compared to last year, primarily as a result of an increase in full-time equivalent employees. Other operating expenses also increased $151 thousand or 6.72%. The increase in full-time equivalent employees and other operating expenses is directly attributable to our growth in assets over the past twelve months. Management will continue to closely monitor noninterest expenses.

5

Results of Operations (Continued)

Liquidity

     The Corporation maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Corporation depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Corporation’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition.

     Principal sources of liquidity for the Corporation include assets considered relatively liquid such as short-term investment securities, federal funds sold and cash and due from banks.

     Cash flows generated from operating activities decreased to $4.598 million compared to $4.875 million for the same period in 2001. This decrease of $277 thousand is mainly the result of a decrease in net interest received. Net cash flows used in investing activities amounted to $61.718 million in 2002 compared to $3.995 million provided by investing activities for the same period in 2001. Most of the current period’s decrease came from both purchases of investment securities and new loan growth outpacing repayments of loans made to customers.

     Net cash flows provided by financing activities were $37.588 million in 2002 compared to $297 thousand in 2001. In 2002, $32.121 million was generated from increases in deposits.

Capital Resources

     The capital management function is a continuous process which consists of providing capital for both the current financial position and the anticipated future growth of the Corporation. As of June 30, 2002 the Corporation’s total risk-based capital ratio stood at 17.52%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 16.24% and 10.72%, respectively. Regulations established by the Federal Deposit Insurance Corporation Improvement Act require that for a bank to be considered well capitalized, it must have a total risk-based capital ratio of 10%, a Tier I risk-based capital ratio of 6% and a Tier I leverage ratio of 5%.

6

Loan Portfolio

     The following shows the composition of loans at the dates indicated:

	(In Thousands of Dollars)
	June 30,		Dec. 31,
	2002		2001
Commercial, financial and agricultural		17,619		18,856
Real Estate — mortgage		280,351		261,268
Installment loans to individuals		151,278		155,346
Total Loans		449,248		435,470

     The following table sets forth aggregate loans in each of the following categories for the dates indicated:

	(In Thousands of Dollars)
	June 30,		Dec. 31,
	2002		2001
Loans accounted for on a nonaccrual basis		1,049		1,669
Loans contractually past due 90 days or more as to interest or principal payments (not included in nonaccrual loans above)		457		1,175
Loans considered troubled debt restructurings (not included in nonaccrual or contractually past due above)		0		0

Management knows of no loans not included in the table above where serious doubt exists as to the ability of the borrower to comply with the current loan repayment terms.

The following shows the amounts of contracted interest income and interest income reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring for the periods indicated:

	(In Thousands of Dollars)
	June 30,		Dec. 31,
	2002		2001
Gross interest that would have been recorded if the loans had been current in accordance with their original terms		31		50
Interest income included in income on the loans		0		0

7

Risk Elements (Continued)

A loan is placed on a nonaccrual basis whenever sufficient information is received to question the collectibility of the loan. Generally, once a loan is placed on a nonaccrual basis, interest that may be accrued and not collected on the loan is charged against earnings.

As of June 30, 2002, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans. As of that date also, there are no other interest-earning assets that are either nonaccrual, past due or restructured.

Summary of Credit Loss Experience

The following is an analysis of the allowance for credit losses for the periods indicated:

		(In Thousands of Dollars)
		Six Months			Year
		Ended			Ended
		June 30,			Dec. 31,
		2002			2001
Balance at beginning of period			6,442			6,115
Loan losses:
	Commercial, financial & agricultural		0			(61	)
	Real estate — mortgage		(16	)		(51	)
	Installment loans to individuals		(575	)		(1,151	)
			(591	)		(1,263	)
Recoveries on previous loan losses:
	Real estate — mortgage		0			34
	Installment loans to individuals		212			476
			212			510
Net loan losses			(379	)		(753	)
Provision charged to operations (1)			540			1,080
Balance at end of period			6,603			6,442
Ratio of net credit losses to average net loans outstanding			.17	%		.17	%

8

Summary of Credit Loss Experience (cont’d)

(1)  The provision for possible credit losses charged to operating expense is based on management’s judgment after taking into consideration all factors connected with the collectibility of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

The allowance for possible credit losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of the dates indicated.

	(In Thousands of Dollars)
	June 30,		Dec. 31,
Types of Loans		2002		2001
Commercial, financial & agricultural		1,887		1,841
Real estate — mortgage		2,028		1,881
Installment		2,688		2,720
Total		6,603		6,442

The allocation of the allowance as shown above should not be interpreted as an indication that charge-offs in 2002 will occur in the same proportions or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.

The percentage of loans in each category to total loans is summarized as follows:

	June 30,			Dec. 31,
Types of Loans		2002			2001
Commercial, financial & agricultural		3.9	%		4.3	%
Real Estate — mortgage		62.4	%		60.0	%
Installment loans to individuals		33.7	%		35.7	%
		100.0	%		100.0	%

9

Item 3.Quantitative and Qualitative Disclosures About Market Risk

     There are no material changes from the end of the preceding fiscal year that would cause additional disclosure of the bank’s exposure to market risk.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

     There are no material pending legal proceedings to which the registrant or its subsidiary is a party, or of which any of their property is the subject, except proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position of the registrant and its subsidiary.

Item 2.Changes in Securities

     Not applicable.

Item 3.Defaults Upon Senior Securities

     Not applicable.

Item 4.Submission of Matters to a Vote of Security Holders

     Not applicable

Item 5.Other Information

     Not applicable.

Item 6.Exhibits and Reports on Form 8-K

(a)  The following exhibits are filed or incorporated by references as part of this report:

2.	Not applicable
3(i)	Not applicable.
3(ii)	Not applicable.

     4.     The registrant agrees to furnish to the Commission upon request copies of all instruments not filed herewith defining the rights of holders of long-term debt of the registrant and its subsidiaries.

10.	Not applicable.
11.	Not applicable.
15.	Not applicable.
18.	Not applicable.
19.	Not applicable.

10

22.	Not applicable.
23.	Not applicable.
24.	Not applicable.
99.	Not applicable.

(b)  -Reports on Form 8-K

         No reports on Form 8-K were filed for the three months ended June 30, 2002.

11

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FARMERS NATIONAL BANC CORP.

Dated: August 13, 2002

/s/ Frank L. Paden

Frank L. Paden
President and Secretary

Dated: August 13, 2002

/s/ Carl D. Culp

Carl D. Culp
Executive Vice President
and Treasurer

12