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.
Joeseph 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 1997
Selected Financial Data (In Thousands except Per Share Data)
Percent
For the Year 1997 1996 Change
Net Income $4,742 $4,131 14.79%
Return on Average Assets 1.34% 1.27% 5.51%
Return on Average Equity 12.67% 11.60% 9.22%
Per Share
Net Income $1.39 $1.20 15.83%
Book Value 11.72 10.51 12.05%
Balances at Year-End
Assets $368,449 $338,112 8.97%
Securities 68,306 47,080 45.09%
Net Loans 271,665 263,504 3.10%
Deposits 305,830 283,810 7.76%
Stockholders Equity 40,923 34,809 17.56%
Shares Outstanding 3,491 3,311 5.44%
Cash Dividends 1,958 1,455 34.57%
<FN>
* Adjusted to reflect weighted outstanding shares and adjusted for stock dividends.
</FN>
FORM 10-K
A copy of the Annual Report filed with the Securities and
Exchange Commission will be available on April 1, 1998
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 26,
1998 at 3:30 p.m.
TABLE OF CONTENTS
Highlights of 1997 1
Report to Stockholders 2-5
Officers 6
Description of Business 7
Graphs & Charts 8-9
Selected Financial Data 10-11
Rate & Volume Analysis 12
Management's Discussion 13-20
Stock Prices and Dividends 21
Accountant's Report 22
Financial Data 23-36
PRESIDENT'S LETTER TO STOCKHOLDERS
Dear Shareholders:
In last year's annual report , my message told our shareholders
of the history of growth and success that we have experienced
during the first 109 years of existence. As we plan and prepare
for the 21st Century, we will look to our history to help guide
us into the future.
Nineteen hundred ninety-seven was truly a year of significant
accomplishments for the Farmers National Banc Corp. Record
earnings, increased cash dividends, another new community branch
bank location, and a new management team committed to the
corporate mission . . . " to maximize shareholder value and act
as the financial leader in the communities we serve as a locally
owned, independent community banking organization."
Your Board of Directors and Management are pleased with our
1997 results and we are very optimistic as we develop a vision
for the future. It is with great pleasure that I share some of
the highlights and accomplishments of your company that were
attained in 1997.
FINANCIAL PERFORMANCE
Net income for the year reached a record high of $4.74 million,
up 14.8 percent over 1996. Total assets for Farmers National
Banc Corp. at year-end were $368 million, an increase of 8.9
percent over year-end 1996.
The net income was $1.39 per share for 1997 as compared to
$1.20 per share in 1996. This represents a 15.8 percent
increase. Cash dividends paid on Farmers National Banc Corp.
common stock were $.58 per share in 1997, representing a 31.8
percent increase over a year ago. In addition to the cash
dividends, the Corporation also paid shareholders a 2% stock
dividend in October 1997. That stock dividend represents the
twenty-second consecutive year that your Directors approved and
paid a stock dividend.
Equity, in the form of capital ratios, is a measure used in
defining safety within the banking industry. The $40.9 million
in Shareholder Equity gives the Corporation an 11.1 percent
total capital to 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 1997, shareholders
reinvested cash dividends of $1.1 million and made additional
cash contributions in the amount of $1.9 million, totaling $3
million, that was used to purchase shares of common stock in
Farmers National Banc Corp.
The market value of our common stock was $22.25 per share
following the two-for-one stock split in January 1997. This
market value has increased to a year-end value of $30.75 per
share, a 38 percent increase during 1997. Our common stock is
quoted on the OTC Bulletin Board under the symbol FMNB.
As I reported to you in the quarterly reports, both positive
earnings and growth trends were attained throughout the year.
The higher earnings and returns were a result of several
factors. Net interest income is the major factor that affects
net income. In 1997, net interest income, before provision for
loan losses, was $15.5 million as compared to $14.1 million in
1996. This 9.4 percent increase is one of the reasons for the
favorable results for 1997. Total loans increased to $275.1
million at year-end 1997, a modest 3.15 percent increase from
1996. Other factors attributing to our successful results for
1997 were a 21.8 percent increase in investment income and a
19.3 percent increase in non-interest income. With management's
ability to increase the sources of income, we were also able to
control the non-interest expenses. The corporation's efficiency
ratio increased by nearly 180 basis points from 56.5 percent in
1996 to 54.7 percent in 1997.
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-seven was a financially successful
year and is detailed in the accompanying financial review,
analysis and graphs which summarize the careful management of
operating fundamentals, size of our Corporation and shareholder
return.
OPERATIONS
In January 1997, Farmers National Bank opened a branch banking
office in Damascus, Ohio. The location represents the ninth
community branch banking office for Farmers National Bank. This
branch has been graciously accepted by the community. The growth
in deposits and loans both exceeded our expectations. This
branch alone represented approximately twenty percent of the
growth in deposits that the entire Corporation experienced in
1997. To better serve the demands of the community, we will be
installing a 24 hour ATM at this site during the first quarter
of 1998.
During the summer of this past year, our Austintown Branch Bank
went through a major exterior capital improvement project.
These improvements included a new gable style roof replacing a
flat roof that had been on the building since 1959. Other
improvements were new windows & doors, a renovated entrance area
and a completely new exterior finish to the entire building.
This new look clearly adds to our strong commitment to the
Austintown community. Additional interior improvements are
planned for the near future.
Farmers National Bank introduced "The Common Sense Card"
during the first quarter of 1997. This debit card product has
been well accepted by our customers as evidenced by the number
of transactions completed through the ATM and merchant network.
I encourage you to take advantage of this product as a way to
automate your transactions and eliminate the need to write
checks.
Plans for 1998 will include the introduction of an automated
phone system that will allow our customers to inquire about
their accounts, transfer funds between accounts, make loan and
utility payments and get current information concerning interest
rates and bank products. With the development of the automated
phone system to allow banking transactions, our efforts will be
turned to alternative ways to deliver bank products and
services. Home banking through your personal computer and/or
Internet banking are two issues that are currently under strong
consideration by our operations staff. It is our strategy to
fully evaluate the viability of these products and how they will
compliment the current products and services we make available
though our network of branches. Customers expect to be able to
obtain products and services any time and any place. We are
committed to have systems in place to meet these expectations.
Technology continues to have an effect on all business
entities. The ability to manage this technology is a major
challenge today. It is our strategy to position our bank to
provide the most efficient means of distributing and delivering
our financial products and services through the mix of modern
technology and common sense banking.
Another product that was completed in 1997 is our own WEB SITE
page on the Internet. You are currently able to access various
information about the bank on the Internet -- our domain name is
www.fnb-canf.com. During 1998, we plan to enhance this web page
and give the visitors additional options to link to other
services and communicate directly with our bank through
electronic mail. Our long range plan is to provide our
customers access to the Internet through a server that will be
located in our bank allowing customers to conduct all their
banking over the Internet.
A non-financial goal for 1997 was to develop and introduce a
new deposit product that was designed for individuals who find
value in an investment product that offers accessibility,
stability and an exceptional return on investment. The Money
Market Index Account was introduced to the public in September
and we now have nearly $2 million in deposit balances.
In planning for 1998, I am pleased to report that we will open
a full-service branch bank located within the Village limits of
Poland, Ohio. This site will be our tenth community branch
office and our fourth expansion project within the last three
years. This project is currently in process and it is our goal
to open in the fall of this year. Much planning has been put
into the design and appearance of this branch, which we feel
will be the premier banking facility located in Poland Village.
Our banking family was saddened by the deaths of three Bank
Officers during 1997. Mr. Charles Burgoyne, Mr. Larry Staub and
Ms. Adrianne Kempers all suddenly passed away during this past
year. Charles Burgoyne, a valued friend, had served the bank
in excess of thirty-nine years in various positions, retiring in
May 1997 as Assistant Vice President/Loan Review Officer and
Compliance Officer. His dedicated service and leadership are
well known and his valued contributions to Farmers National Bank
will be greatly missed. Larry Staub had been with the bank over
eight years and served in the capacity of Branch Manager at our
Cornersburg and Western Reserve branch offices. Larry's
management ability, organizational skills, and compassion for
fellow employees are qualities that cannot be replaced.
Adrianne Kempers was employed with the bank for the past two
years as our Internal Auditor for both the Bank and the Bank
holding company. She was a member of the Operations Committee
and served as an Executive Officer of the Bank. Adrianne's
professional vocation as a CPA and her sincere commitment to
community service best exemplified her role with our bank.
These three individuals will be greatly missed as friends and as
co-workers. Each contributed to our success in their own way.
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
Farmers National Banc Corp.
Officers
William D. Stewart Richard L. Calvin
Chairman Vice Chairman
Frank L. Paden Carl D. Culp
President and Secretary Executive Vice President
& Treasurer
Donald F. Lukas
Senior Vice President
Farmers National Bank of Canfield
Officers & Management
Frank L. Paden Andrew A. Baird
President & CEO Asst. Cashier, Manager-Data Center
Carl D. Culp Joseph E. Chapman
Executive Vice President, Assistant Cashier,
Cashier & CFO Manager - Collection Department
Donald F. Lukas Janine M. Cox
Senior Vice President, Assistant Cashier, Credit Admin.
Bank Systems
Charlene K. Daugherty
Mark L. Graham Assistant Cashier/Human Resources
Vice President/Loan Administrator
Merle Garritano
Bradley S. Henderson Assistant Cashier/Consumer Loans
Vice President,
Branch Administration & Security Linda Liston
Compliance Officer
Anthony F. Peluso
Vice President/Human Resources Joanie Orr
General Ledger Accounting Officer
Alfred F. Ridel
Vice President/Consumer Loans Gary J. Rosati
Staff Legal Counsel
Daniel G. Cerroni
Assistant Vice President, Diane Moran
Main Office Loan Department Mortgage Loan Department
Barbara C. Fisher Anita L. Jarvis
Assistant Vice President, Internal Auditor
Marketing & Deposit Operations
Rob Mort
Roy A. Jackson Corporate Financial Accountant
Assistant Vice President,/Indirect Lending
Dorothy J. Weeden
Fred Kotheimer Assistant Cashier,
Assistant Vice President/Loan Review Manager - Main Office
Susan E. Miller Pamela J. Cleghorn
Assistant Vice President, Assistant Cashier,
Corporate Services Administration Manager, Colonial Plaza
Phyllis A. Welton Keith A. Leonard
Assistant Vice President, Assistant Cashier
Manager - Bookkeeping Dept. Manager - Austintown Office
Patricia C. Rosko Larry E. White
Asst. Manager, Austintown Office Assistant Vice President,
Manager - Salem Office
Dennis S. Vitt
Assistant Cashier, Gregory Walla
Manager - Lake Milton Office Asst. Manager, Salem Office
Jennifer Tikkanen Geraldine J. Gbur
Asst. Manager, Lake Milton Office Assistant Cashier,
Manager - Columbiana Office
Robert L. Rozeski
Assistant Cashier, Jane C. Logan
Manager, Cornersburg Office Asst. Manager, Columbiana Office
Barbara L. Sitler Kay A. Hedl
Asst. Manager, Cornersburg Manager, Leetonia Office
Clare F. Baldwin Lynnita J. Kaschak
Asst. Manager, Western Reserve Office Asst. Manager, Leetonia
Michele M. Ossoff
Assistant Cashier,
Manager, Damascus 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 and Donald F. Lukas, Senior Vice
President.
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, 1997, the Corporation and its
subsidiary had 180 employees. The bank considers its relations
with its employees to be satisfactory.
Picture of Exterior of Main Office
GRAPHS AND CHARTS
Bar Graph Depicting Total Deposits in Thousands
Year Amount
1993 $240,440
1994 $244,302
1995 $267,955
1996 $283,811
1997 $305,830
Bar Graph Depicting Return on Average Equity
Year Amount
1993 12.85%
1994 12.58%
1995 11.45%
1996 11.60%
1997 12.67%
Bar Graph Depicting Return on Average Assets
Year Amount
1993 1.16%
1994 1.22%
1995 1.20%
1996 1.27%
1997 1.34%
Bar Graph Depicting Net Income in Thousands
Year Amount
1993 $3,160
1994 $3,424
1995 $3,576
1996 $4,131
1997 $4,742
Bar Graph Depicting Net Loans in Thousands
Year Amount
1993 $200,993
1994 $214,988
1995 $229,249
1996 $263,504
1997 $271,665
Bar Graph Depicting Net Income Per Share
Year Amount
1993 $1.02
1994 $1.06
1995 $1.07
1996 $1.20
1997 $1.39
Bar Graph Depicting Loans Loss Provision/Non-Performing Loans
Year Amount
1993 97.35%
1994 154.63%
1995 192.87%
1996 152.42%
1997 383.13%
Bar Graph Depicting Total Stockholders Equity in Thousands
Year Amount
1993 $25,996
1994 $28,915
1995 $33,976
1996 $34,809
1997 $40,923
SELECTED FINANCIAL DATA
(In Thousands except Per Share Data)
For the Years Ending 1997 1996 1995 1994 1993
Summary of Earnings
Total Interest Income (including fees on loans) $27,576 $24,877 $21,960 $19,731 $20,166
Total Interest Expense 12,129 10,756 9,688 8,000 8,738
Net Interest Income 15,447 14,121 12,273 11,731 11,428
Provision for Credit Losses 855 655 270 330 620
Total Other Income 1,768 1,478 1,342 1,357 1,298
Total Other Expense 9,418 8,883 8,118 7,755 7,473
Income Before Federal Income Taxes 6,942 6,061 5,226 5,003 4,633
Federal Income Taxes 2,200 1,930 1,650 1,579 1,473
NET INCOME 4,742 4,131 3,576 3,424 3,160
Per Share Data (Note)
Net Income 1.39 1.20 1.07 1.06 1.02
Cash Dividends Paid 0.58 0.44 0.40 0.40 0.38
Book Value at Year-End 11.72 10.51 10.33 9.29 8.90
Balances at Year-End
Total Assets 368,449 338,112 314,229 284,445 275,385
Earning Assets 349,102 319,449 294,122 268,724 260,965
Total Deposits 305,830 283,810 267,955 244,302 240,440
Net Loans 271,665 263,504 229,249 214,988 200,993
Total Stockholder's Equity 40,923 34,809 33,976 28,915 25,996
Average Balances
Total Assets 354,005 325,537 297,159 279,839 273,257
Total Stockholder's Equity 37,431 35,629 31,177 27,221 24,557
Significant Ratios
Return on Average Assets (ROA) 1.34% 1.27% 1.20% 1.22% 1.16%
Return on Average Equity (ROE) 12.67 11.60 11.45 12.58 12.85
Average Earning Assets/Average Assets 95.28 94.88 94.75 94.91 94.55
Net Loans/Deposits 88.83 92.85 85.56 88.00 83.59
Allowance for Credit Losses/Total Loans 1.25 1.20 1.25 1.26 1.29
Allowance for Credit Losses/Nonperforming Loans 383.13 152.42 192.87 154.63 97.35
Efficiency Ratio 54.71 56.50 59.63 59.66 58.98
Cash Dividends as a Percentage of Net Income 41.29 35.22 35.46 34.45 33.41
Dividends Per Share to Net Income Per Share 41.73 36.07 36.04 34.96 33.94
<FN>
Note: Per share data is based on weighted average shares outstanding adjusted for stock dividends.
</FN>
Average Balance Sheets and Related Yields and Rates
(In Thousands of Dollars)
Years ended December 31, 1997 1996 1995
EARNING ASSETS
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
Loans $268,581 $23,487 8.74% $250,616 $21,519 8.59% $221,955 $18,580 8.37%
Taxable securities 51,520 3,123 6.06 40,334 2,352 5.83 39,167 2,183 5.57
Tax-exempt securities 8,072 712 8.82 7,434 683 9.19 7,266 670 9.22
Federal funds sold 9,116 503 5.52 10,506 562 5.35 13,181 761 5.77
Total earning assets 337,289 27,825 8.25 308,890 25,116 8.13 281,569 22,194 7.88
NONEARNING ASSETS
Cash and due from banks 11,001 11,310 11,437
Premises and equipment 5,647 5,597 4,671
Allowance for Loan Losses (3,282) (2,946) (2,897)
Other assets 3,350 2,686 2,379
Total Assets $354,005 $325,537 $297,159
INTEREST-BEARING LIABILITIES
Time deposits $141,659 $8,094 5.71% $122,973 $7,095 5.77% $108,626 $6,205 5.71%
Savings deposits 74,117 1,870 2.52 76,182 1,931 2.53 74,752 1,986 2.66
Demand deposits 54,560 1,141 2.09 51,890 1,092 2.10 48,267 1,009 2.09
Repurchase agreements 15,039 676 4.49 12,075 497 4.12 10,032 440 4.39
Borrowings 6,000 348 5.80 2,651 142 5.36 804 48 5.97
Total Interest-Bearing Liabilities 291,375 12,129 4.16 265,771 10,757 4.05 242,481 9,688 4.00
NONINTEREST-BEARING LIABILITIES
Demand deposits 21,868 22,979 20,631
Other Liabilities 3,331 1,158 2,870
Stockholder's equity 37,431 35,629 31,177
Total Liabilities and
Stockholders' Equity $354,005 $325,537 $297,159
Net interest income $15,696 $14,359 $12,506
Net interest income to earning assets 4.65% 4.65% 4.44%
<FN>
Fully taxable equivalent basis computed at 35% in 1997, 1996 and 1995.
</FN>
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)
1997 change from 1996 1996 change from 1995
Net Change Due Change Due Net Change Due Change Due
Change To Volume To Rate Change To Volume To Rate
Tax Equivalent Interest Income
Loans $1,968 $1,554 $414 $2,939 $2,393 $546
Taxable securities 771 653 118 169 65 104
Tax-exempt securities 29 58 (29) 13 15 (2)
Federal funds sold (59) (74) 15 (199) (154) (45)
Total interest income $2,709 $2,191 $518 $2,922 $2,319 $603
Interest Expense
Time deposits $999 $1,081 ($82) $890 $817 $73
Savings deposits (61) (53) (8) (55) 41 (96)
Demand deposits 49 55 (6) 83 77 6
Repurchase agreements 179 123 56 57 90 (33)
Borrowings 206 26 180 94 110 (16)
Total interest expense $1,372 $1,232 $140 $1,069 $1,135 ($66)
Increase in tax equivalent
net interest income $1,337 $1,853
<FN>
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.
</FN>
MANAGEMENT'S DISCUSSION
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Corporation's net income totaled $4.742 million during
1997, an increase of 14.79% from $4.131 million for 1996. On a
per share basis, net income was $1.39 for 1997 as compared to
$1.20 for 1996 and $1.07 for 1995. Common comparative ratios
for results of operations include the return on average assets
and return on average stockholders equity. For 1997, the return
on average equity was 12.67% as compared to 11.60% for 1996 and
11.45% for 1995. The return on average assets was 1.34% for
1997 as compared to 1.27% and 1.20% for 1996 and 1995,
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 investment and loan
portfolio, particularly commercial, commercial real estate and
home equity 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 1997, net interest income increased $1.326
million or 9.39% over 1996. The increase for 1996 was $1.849
million or 15.06% over 1995. Interest-earning assets averaged
$337.289 million during 1997 representing a 9.19% increase over
1996, while 1996 averaged $308.890 million or a 9.70% increase
over 1995.
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 1997 and 1996 the net interest
margin, measured on a fully taxable equivalent basis was 4.65%
in comparison to 4.44% for 1995.
Total interest income was $27.576 million for 1997 as compared
to $24.877 million and $21.960 million for 1996 and 1995,
respectively. The 10.85% increase in interest income is
attributed to a 3.1% increase in net loans and an increase in the
interest rate earned from 8.59% to 8.74%. Net loans were $271.665
million at year-end 1997 as compared to $263.504 million at
year-end 1996. Interest and dividends on securities also increased
21.8% from $3.358 million in 1996 to $4.089 million in 1997. The
increase was also attributable to a 46.05% increase in the balance
of securities available for sale, as well as an increase in the
overall yield on these assets.
Total interest expense amounted to $12.129 million for 1997,
representing a 12.76% increase from 1996 while interest expense
of $10.756 million for 1996 represents a 11.03% increase from
1995. The increase in interest expense is primarily due to an
increase in the level of borrowings and the average rate paid on
these liabilities. The average balances for time deposits
increased by 15.2% over 1996, but the interest rate paid on
those deposits decreased by 6 basis points.
Other Income
Other income increased $290 thousand or 19.62% from 1996.
Total other income for 1996 increased $136 thousand or 10.13%
from 1995. 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 1997 increased 6.03% over 1996 as
compared to an increase of 9.41% from 1996 over 1995. The rise
in other expenses is primarily due to salary and employee
benefits, which increased $280 thousand or 5.86% from 1996.
This increase is the result of hiring additional employees to
staff the new branch offices. The Corporation's other operating
expenses also increased $232 thousand or 9.12% over 1996.
These expenses are increasing each year due primarily to asset growth
and the increased volume of the operations of the bank. Management
will continue to closely monitor and keep the increases in 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 1997, 1996 and 1995.
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 1997, 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, 1997 December 31, 1996 December 31, 1995
Total Within Total Within Total Within
3 month 12 month 3 month 12 month 3 month 12 month
Total Interest-Sensitive Assets $43,489 $117,790 $36,137 $105,161 $44,064 $100,658
Total Interest-Sensitive Liabilities 70,990 129,809 56,249 112,027 55,706 103,701
Total Sensitivity Gap (27,501) (12,019) (20,112) (6,866) (11,642) (3,043)
Ratio of Interest-Sensitive Assets to
Interest-Sensitive Liabilities 0.61 0.91 0.64 0.94 0.79 0.97
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, 1997, 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, 1997 amounted to $4.612
million.
Cash flows generated from operating activities increased
12.01% to $7.043 million in 1997 compared to $6.288 million in
1996. 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
decreased 9.92% to $32.171 million in 1997 compared to $35.715
million in 1996. This decrease in cash used resulted from an
increase in proceeds from sales of investment securities of
$3.106 million. Although the net increase in loans made to
customers dropped from $35.031 million in 1996 to $10.464
million in 1997, this was offset by a corresponding increase in
purchases of investment securities, which increased from $14.467
million in 1996 to 38.547 million in 1997. Cash flows provided
from financing activities amount to $25.341 million as compared
to $19.000 million in 1996. This 33.38% increase is primarily
the result of treasury stock transactions in 1996 and 1997.
The Corporation's net increase in Federal Home Loan Bank
Borrowings also grew by $1.812 million.
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, 1997 1996 1995 1994 1993
Commercial, Financial and Agricultural $10,784 3.9% $8,454 3.1% $19,842 8.6% $22,465 10.3% $21,026 10.4%
Real Estate - Mortgage 147,979 53.8 136,212 51.1 110,870 47.9 102,322 47.0 92,115 45.2
Installment Loans to Individuals 116,331 42.3 122,036 45.8 100,748 43.5 92,947 42.7 90,473 44.4
Total Loans $275,094 100.0% $266,702 100.0% $231,460 100.0% $217,734 100.0% $203,614 100.0%
The composition of loans for 1993 through 1996 have been reclassified to
conform with the presentation for 1997. Such reclassification had no
effect on results of operations.
The following schedule sets forth maturities based on remaining scheduled
repayments of principal for various categories of loans listed above as
of December 31, 1997:
(In Thousands of Dollars)
Types of Loans 1 Year or less 1 to 5 Years Over 5 Years
Commercial, Financial and
Agricultural $5,314 $4,117 $1,353
The amounts of commerical, financial and agricultural loans as of
December 31, 1997, 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 $4,360 $1,031 $5,391
Fixed Rates of Interest 954 4,439 5,393
Total Loans $5,314 $5,470 $10,784
Loan Portfolio
Total net loans were $271.665 million at year-end 1997 compared
to $263.504 million at year-end 1996. This represents an
increase of $8.161 million or 3.10%. Loans comprised 79.6% of
the Bank's average earning assets during 1997, compared to 81.1%
in 1996. The product mix in the Loan Portfolio shows Commercial
Loans comprising 3.9%, Real Estate Mortgage Loans (Residential and
Commercial) 53.8% and Installment Loans to Individuals 42.3% at
December 31, 1997 compared with 3.1%, 51.1% and 45.8%, respectively,
at December 31, 1996.
Loans contributed 84.4% of total interest income in 1997
compared to 86.5% in 1996. Loan yield was 8.74% in 1997, 49
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 decreased from $122.036 million
on December 31, 1996 to $116.331 million on December 31, 1997
which represents a 4.9% decrease. 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 87.4% of the Installment Loan Portfolio. Net
loan losses on the Installment Loan portfolio were $667 thousand
in 1997 as compared to $295 thousand in 1996. This represents
.57% of total Installments Loans outstanding for 1997 and .24%
for 1996. Management attributes the increase in net losses in 1997
to the national trend in the economy, indicating high consumer debt
and an increased number of personal bankruptcy filings.
Real Estate Mortgage Loans increased to $147.979 million at
December 31, 1997, an increase of 8.6% over 1996. This portfolio
consists of $108.077 million of 1-4 family residential properties and
$39.902 million in commercial real estate properties, all made within
the Bank's primary market area. The corporation originated both fixed
rate and adjustable rate mortgages during 1997. All mortgage loans
made in 1997 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, 1997 increased from year-end
1996 with outstanding balances of $10.784 million. 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 and leasehold improvements, the
purchase of inventory, general working capital purposes and small
business lines of credit.
Summary of Loan Loss Experience
The following is an analysis of the allowance for loan losses for the periods indicated:
(In Thousands of Dollars)
Years Ended December 31, 1997 1996 1995 1994 1993
Balance at Beginning of Year $3,198 $2,911 $2,746 $2,621 $2,274
Loan Losses:
Commercial, Financial and Agricultural 0 (75) (1) (185) (69)
Real Estate-Mortgage 0 (22) 0 0 (16)
Installment Loans to Individuals (824) (455) (275) (202) (351)
Total Loan Losses (824) (552) (276) (387) (436)
Recoveries on Previous Loan Losses:
Commercial, Financial and Agricultural 3 9 44 39 36
Real Estate-Mortgage 40 15 0 0 7
Installment Loans to Individuals 157 160 127 143 120
Total Recoveries 200 184 171 182 163
Net Loan Losses (624) (368) (105) (205) (273)
Provision Charged to Operations (1) 855 655 270 330 620
Balance at End of Year $3,429 $3,198 $2,911 $2,746 $2,621
Ratio of Net Loan Losses to Average
Net Loans and Leases Outstanding 0.23% 0.15% 0.05% 0.10% 0.14%
<FN>
(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.
</FN>
Provisions charged to operations increased from $655 thousand
in 1996 to $855 thousand in 1997. The provision charged to
operations was increased to offset an increase in net loan losses
in 1997. The balance in the allowance for credit losses has
increased substantially since 1993 to $3.429 million or 1.25% of
loans at December 31,1997. This ratio has increased from the 1.20%
reported at December 31, 1996. The allowance for credit losses as
a percentage of nonperforming loans increased substantially from
152.42% at December 31, 1996 to 383.13% at December 31, 1997.
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)
December 31, 1997 1996 1995 1994 1993
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Commercial, Financial and Agricultural $1,928 3.9% $1,873 3.1% $1,800 8.6% $1,700 10.3% $1,692 10.4%
Real Estate-Mortgage 275 53.8 263 51.1 250 47.9 200 47.0 170 45.2
Installment Loans to Individuals 1,226 42.3 1,062 45.8 861 43.5 846 42.7 759 44.4
$3,429 100.0% $3,198 100.0% $2,911 100.0% $2,746 100.0% $2,621 100.0%
<FN>
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.
</FN>
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.
Normally, 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, 1997 1996 1995 1994 1993
Loans Accounted For on a Nonaccrual Basis $493 $0 $125 $302 $349
Loans Contractually Past Due 90 Days or More as to Interest
or Principal Payments (Not Included in Nonaccrual Loans Above) 402 2,098 1,384 1,475 2,343
Loans Considered Troubled Debt Restructuring
(Not Included in Nonaccrual Loans or Contractually Past Due Above) 0 0 75 0 108
<FN>
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.
</FN>
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, 1997, 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,
restructured or nonperforming.
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, 1997 1996 1995 1994 1993
Gross Interest Income That Would have been Recorded if the Loans
had been Current in Accordance with Their Original Terms $9 $7 $5 $21 $40
Interest Income Included in Income on the Loans 13 0 0 0 0
Investment Securities
The investment securities portfolio increased 45.08% in 1997.
Most of this increase occurred in U.S. Treasury and U.S.
Government agencies, which grew $22 million in 1997. The increase
is primarily attributable to excess funds resulting from deposit
growth outpacing the current year loan demand. 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, 1997 1996 1995
U.S. Treasury Securities and Government Agencies $53,449 $31,449 $31,692
Obligations of States and Political Subdivisons 9,145 7,501 6,943
Other Securities 5,712 8,130 8,698
$68,306 $47,080 $47,333
A summary of securities held at December 31, 1997, 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, 1997
Book Value Weighted Average Yield (1)
U.S. Treasury and U.S. Government Agency Securities:
Maturing Within One Year $11,529 5.51%
Maturing After One Year But Within Five Years 31,518 6.14%
Maturing After Ten Years 10,402 6.47%
Total U.S. Treasury and U.S. Government Agency Securities: $53,449 6.06%
Obligations of States and Political Subdivisions
Maturing Within One Year $323 8.62%
Maturing After One Year But Within Five Years 2,165 9.10%
Maturing After Five Years But Within Ten Years 2,606 8.31%
Maturing After Ten Years 4,051 8.60%
Total Obligations of States and Political Subdivisions $9,145 8.63%
Other Securities
Maturing Within One Year $2,008 6.61%
Maturing After One Year But Within Five Years 3,704 6.22%
Total Other Securities $5,712 6.42%
<FN>
(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 $9.371 thousand, $63.771
thousand, $72.803 thousand and $116.151 thousand for the four
ranges of maturities.
</FN>
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 $283.810 million in 1996
to $305.830 million in 1997, which equates to an increase of
7.76%. Most of this growth occurred in time deposits, which
increased from $129.650 million in 1996 to $147.841 million in
1997. This increase is primarily the result of two special
rate offerings on certificates of deposit occurring in the first
and third quarters of the year which generated approximately $10
million in new time deposit money to the Corporation.
Average Deposits
The following table shows the classification of average deposits for
the periods indicated:
(In Thousands of Dollars)
Average Balances on December 31, 1997 1996 1995
Noninterest-Bearing Demand Deposits $21,868 $22,979 $20,631
Interest-Bearing Demand Deposits 54,560 51,890 48,267
Savings Deposits 74,117 76,182 74,752
Time Deposits 141,659 122,973 108,626
Total Average Deposits $292,204 $274,024 $252,276
The following shows the average rate paid on the following deposit
categories for the periods indicated:
Years ended December 31, 1997 1996 1995
Interest-Bearing Demand Deposits 2.09% 2.10% 2.09%
Savings 2.52% 2.53% 2.66%
Time Deposits 5.71% 5.77% 5.71%
A summary of time deposits of $100,000 or more as of December 31, 1997
by maturity range is shown below:
(In Thousands of Dollars)
3 Months or Less Remaining Until Maturity $11,735
3 to 6 Months Remaining Until Maturity 8,159
6 to 12 Months Remaining Until Maturity 5,225
Over 12 Months Remaining Until Maturity 5,525
Total Outstanding $30,644
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 1997, 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 1997.
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 12.67%, 11.60% and 11.45% for 1997, 1996 and
1995, respectively. Total cash dividends declared in 1997
represented 41.29% of net income as compared to 35.22% in 1996
and 35.46% in 1995. The resulting internal equity growth
percentage amounted to 7.44% in 1997 as compared to 7.51% in
1996 and 7.39% in 1995.
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). In 1997, the bank subsidiary received approval
from the Comptroller of the Currency to exceed its maximum amount of
retained earnings available for distribution by $635 thousand. As of
December 31, 1997 the bank subsidiary had $12.133 million 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, 1997, 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 14.29% and 15.55% respectively.
The bank subsidiary's leverage ratio at December 31, 1997 was
9.89%.
Audit
The Company's acting 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 1997.
Compliance
Compliance is an important element of a financial
institution's ongoing operation with various laws and
regulations. Failure to comply with regulations can result in
significant and often costly penalties or mandated actions from
regulatory agencies. Therefore, policies and procedures are set
forth to govern the way departments function and ensure fair,
consistent and sound banking practices. When those policies and
procedures are affected by new regulations, or regulations
change, the Compliance Department is responsible to change
those policies involved, and is responsible to inform and train
personnel.
The task of training is large, particularly considering the
length and complexity of various regulations. The bank's
management depends on the Compliance Department to communicate
with the appropriate responsibilities to each area. The
training segment of compliance has become extremely important in
recent years.
Monitoring, or testing, procedures are also focused upon in
several areas to ensure that compliance of the regulations and
laws are within compliance standards. Often, the extent of
monitoring relates to the complexity or length of the
regulation. Upon the completion of monitoring projects, areas
where training are needed may be revealed.
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.
Bank Information Systems
The Corporation has conducted a comprehensive review of its
computer systems to identify the systems that could be affected
by the "Year 2000" issue and is developing an implementation
plan to resolve the issue. The Year 2000 problem is the result
of computer programs being written using two digits rather than
four to define the applicable year. Any of the Corporation's
programs that have time sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The
Corporation presently believes that, with modifications to
existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the
Corporation's computer systems as so modified and converted.
At this time, it is not expected that expenses to address Year
2000 issues will materially impact future operating results.
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, 1997, there were 2,128
shareholders of record of common stock.
Market and Dividend Summary
Dividend Date High Low Dividend
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
March 1997 26.75 23.13 0.13
June 1997 27.25 25.00 0.14
September 1997 29.00 25.63 0.15
October 1997 2% Stock Dividend
December 1997 33.00 27.38 0.16
Bar Graph Depicting Market Value and Book Value of Common Stock
Market Book
Value Value
Year
1993 $10.50 $8.90
1994 $14.75 $9.29
1995 $19.70 $10.33
1996 $23.13 $10.51
1997 $30.75 $11.72
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, 1998
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, 1997 and 1996 and the related consolidated
statements of income, stockholders equity and cash flows for
each of the three years in the period ended December 31, 1997.
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, 1997 and 1996 and the
consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted
accounting principles.
Hill, Barth & King, Inc.
Certified Public Accountants
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
December 31, 1997 1996
ASSETS
Cash & due from banks $13,480 $13,302
Federal funds sold 5,702 5,667
TOTAL CASH AND CASH EQUIVALENTS 19,182 18,969
Securities available for sale - NOTE B 66,620 45,612
Other securities 1,686 1,468
Loans - NOTE C 275,094 266,702
Less allowance for credit losses - NOTE D 3,429 3,198
NET LOANS 271,665 263,504
Premises and equipment, net - NOTE E 6,025 5,697
Other assets 3,271 2,862
$368,449 $338,112
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (all domestic):
Noninterest-bearing $26,282 $23,468
Interest-bearing - NOTE F 279,548 260,342
TOTAL DEPOSITS 305,830 283,810
Borrowings:
U. S. Treasury interest-bearing demand note 559 622
Securities sold under repurchase agreements - NOTE G 14,659 15,749
Federal Home Loan Bank advances 4,612 1,400
TOTAL BORROWINGS 19,830 17,771
Other liabilities and deferred credits 1,866 1,722
TOTAL LIABILITIES 327,526 303,303
Commitments and contingent liabilities - NOTE H
Stockholders Equity - NOTES I, J:
Common Stock - Authorized 5,000,000 shares;
issued and outstanding 3,491,137 in 1997 and
3,311,268 in 1996 24,792 24,254
Retained earnings 15,717 14,766
Unrealized appreciation on debt securities,
net of applicable income taxes 414 108
Treasury stock, at cost; 164,544 shares in 1996 0 (4,319)
TOTAL STOCKHOLDERS EQUITY 40,923 34,809
$368,449 $338,112
<FN>
See accompanying notes to consolidated financial statements
</FN>
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands except Per Share Data)
Years ended December 31, 1997 1996 1995
INTEREST INCOME
Interest and fees on loans $23,487 $21,519 $18,580
Interest and dividends on securities:
Taxable interest 3,017 2,257 2,154
Nontaxable interest 463 444 439
Dividends 106 95 26
Interest on federal funds sold 503 562 761
TOTAL INTEREST INCOME 27,576 24,877 21,960
INTEREST EXPENSE
Deposits 11,105 10,118 9,200
Short-term borrowings 1,024 638 488
TOTAL INTEREST EXPENSE 12,129 10,756 9,688
NET INTEREST INCOME 15,447 14,121 12,272
Provision for credit losses 855 655 270
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 14,592 13,466 12,002
OTHER INCOME
Service charges on deposit accounts 1,176 1,090 972
Investment security gains 6 0 0
Other operating income 586 388 370
TOTAL OTHER INCOME 1,768 1,478 1,342
16,360 14,944 13,344
OTHER EXPENSES
Salaries and employee benefits - NOTE K 5,059 4,779 4,127
Net occupancy expense of premises 561 525 540
Furniture and equipment expense, including depreciation 491 521 463
State and local taxes 532 515 440
Other operating expenses 2,775 2,543 2,548
TOTAL OTHER EXPENSES 9,418 8,883 8,118
INCOME BEFORE FEDERAL INCOME TAXES 6,942 6,061 5,226
FEDERAL INCOME TAXES - NOTE L 2,200 1,930 1,650
NET INCOME $4,742 $4,131 $3,576
NET INCOME PER SHARE $1.39 $1.20 $1.07
<FN>
See accompanying notes to consolidated financial statements
</FN>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Years ended December 31, 1997 1996 1995
COMMON STOCK
Balance at beginning of year $24,254 $4,111 $3,892
33,729 shares issued as a 2% stock dividend in 1996,
and 31,956 in 1995, including fractional shares. 0 1,501 80
Excess of fair value of shares sold over treasury stock cost 15 0 0
Excess of fair value of shares issued as a stock dividend
over treasury stock cost 51 0 0
15,335 shares sold in 1997,
59,618 shares sold in 1996 and 55,611 in 1995 472 2,583 139
Transfer of additional paid-in capital to common stock 0 16,059 0
Balance at end of year 24,792 24,254 4,111
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 0 16,059 13,301
Excess proceeds over par value of shares sold
in 1995 0 0 1,735
Excess of fair value over par value of shares issued as
stock dividends in 1995, including
fractional shares 0 0 1,023
Transfer of balance to common stock 0 (16,059) 0
Balance at end of year 0 0 16,059
RETAINED EARNINGS
Balance at beginning of year 14,766 13,591 12,385
Net income 4,742 4,131 3,576
Dividends declared:
$.58 cash dividends per share in 1997,
$.88 in 1996 and $.80 in 1995. (1,958) (1,455) (1,268)
Stock dividends (1,833) (1,501) (1,102)
Balance at end of year 15,717 14,766 13,591
UNREALIZED APPRECIATION (DEPRECIATION)
ON DEBT SECURITIES
Balance at beginning of year 109 215 (663)
Net change in unrealized appreciation (depreciation) on
debt securities, net of income taxes. 305 (107) 878
Balance at end of year 414 108 215
TREASURY STOCK, AT COST
Balance at beginning of year (4,319) 0 0
Purchase of treasury stock 0 (4,319) 0
67,907 shares reissued as a 2% stock dividend in 1997,
including fractional shares 1,783 0 0
Sale of treasury stock 2,536 0 0
Balance at end of year 0 (4,319) 0
TOTAL STOCKHOLDERS EQUITY AT END OF YEAR $40,923 $34,809 $33,976
<FN>
See accompanying notes to consolidated financial statements
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Years ended December 31, 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $28,327 $25,979 $22,785
Fees and commissions received 1,723 1,418 1,342
Interest paid (12,012) (10,759) (9,400)
Cash paid to suppliers and employees (8,777) (8,275) (7,779)
Income taxes paid (2,219) (2,075) (1,685)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,042 6,288 5,263
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 14,479 14,329 18,140
Proceeds from maturities of investment securities held to maturity 0 0 2,343
Proceeds from sales of investment securities available for sale 3,106 0 2,000
Purchases of other securities and securities available for sale (38,547) (14,467) (18,114)
Purchases of investment securities held to maturity 0 0 (2,639)
Net increase in loans made to customers (10,464) (35,031) (16,080)
Purchases of premises and equipment (745) (546) (1,583)
Proceeds from sale of other real estate 0 0 252
NET CASH USED IN INVESTING ACTIVITIES (32,171) (35,715) (15,681)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 3,115 (906) (3,149)
Net increase in time deposits 17,848 21,381 27,746
Net increase in Federal Home Loan Bank Borrowings 3,212 1,400 0
Sale (purchase) of Treasury Stock 2,537 (4,319) 0
Dividends paid (1,858) (1,138) (1,167)
Proceeds from sale of common stock 488 2,582 1,875
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,342 19,000 25,305
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 213 (10,427) 14,887
CASH AND CASH EQUIVALENTS
Beginning of year 18,969 29,396 14,509
End of year $19,182 $18,969 $29,396
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATIONS
Net income $4,742 $4,131 $3,576
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 398 394 379
Amortization and accretion 1,228 1,178 967
Provision for credit losses 855 655 270
Gain on sale of investment securities (6) 0 0
Deferred income taxes (77) (70) (13)
Other (98) 0 84
NET CASH PROVIDED BY OPERATING ACTIVITIES $7,042 $6,288 $5,263
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities:
Unrealized loss on available for sale securities $42 $48 $68
Transfer of investment securities available for sale 0 0 4,664
Land exchanged for other borrowing 0 0 250
<FN>
See accompanying notes to consolidated financial statements
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Farmers National Banc Corp. and Subsidiary
December 31, 1997, 1996, and 1995
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
1997 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 from 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 3,422,200 for 1997, 3,445,705 for 1996 and 3,348,340 for
1995.
Reclassifications: The consolidated financial statements for
1996 have been reclassified to conform with the presentation for
1997. Such reclassifications had no effect on net results of
operations.
NOTE B - SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1997 and 1996 are summarized as follows:
(In Thousands of Dollars)
1997 1996
U.S. Treasury and U.S. Government agencies $53,449 $31,449
Corporate debt securities 4,026 6,662
Obligations of states and political subdivisions 9,145 7,501
TOTALS $66,620 $45,612
Net unrealized gains (losses) for securities available for sale at December 31, 1997 and 1996 are
summarized below:
(In Thousands of Dollars)
UNREALIZED UNREALIZED NET UNREALIZED
December 31, 1997 GAINS LOSSES GAINS (LOSSES)
U.S. Treasury and U.S. Government agencies $531 ($23) $508
Corporate debt securities 12 (15) (3)
Obligations of states and political subdivisions 126 (4) 122
TOTALS $669 ($42) $627
December 31, 1996
U.S. Treasury and U.S. Government agencies $82 ($37) $45
Corporate debt securities 42 (10) 32
Obligations of states and political subdivisions 88 (1) 87
TOTALS $212 ($48) $164
The fair value and book value of securities available for sale by contractual maturities at December
31, 1997 are summarized below:
(In Thousands of Dollars)
FAIR VALUE BOOK VALUE
Due in 1 year or less $13,881 $13,861
Due after one year through five years 35,655 35,320
Due after five years through ten years 2,631 2,610
Due after ten years 14,453 14,203
TOTALS $66,620 $65,994
Securities with a carrying value of $35 million at December 31, 1997 and
$30 million at December 31, 1996 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:
(In Thousands of Dollars)
December 31, 1997 1996
Real Estate - Mortgage $148,740 $136,849
Installment Loans to Individuals 114,470 120,069
Commercial, Financial and Agricultural 10,784 8,522
Subtotal 273,994 265,440
Net origination and deferred loan fees 1,100 1,262
TOTAL LOANS $275,094 $266,702
<FN>
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.
</FN>
NOTE D - ALLOWANCE FOR CREDIT LOSSES
Following is an analysis of changes in the allowance for credit losses for the years
ended December 31:
(In Thousands of Dollars)
1997 1996 1995
Balance at beginning of year $3,198 $2,911 $2,746
Additions:
Provision for credit losses 855 655 270
Recoveries on loans previously charged off 200 184 171
TOTAL ADDITIONS 4,253 3,750 3,187
Credits charged off (824) (552) (276)
Balance at end of year $3,429 $3,198 $2,911
<FN>
The allowance for federal income tax purposes amounted to $753 thousand at December 31, 1997,
which is $2.676 million less than the allowance for financial accounting purposes.
</FN>
NOTE E - PREMISES AND EQUIPMENT
Following is a summary of premises and equipment:
(In Thousands of Dollars)
December 31, 1997 1996
Land $1,631 $1,205
Premises 5,129 4,987
Equipment 3,625 3,481
Leasehold Improvements 180 180
10,565 9,853
Less accumulated depreciation (4,540) (4,156)
NET BOOK VALUE $6,025 $5,697
Depreciation expense was $398 thousand for the year ended December 31, 1997,
$394 thousand for 1996 and $379 thousand for 1995.
NOTE F - INTEREST-BEARING DEPOSITS
Following is a summary of scheduled maturities of certificates of deposit
during the years following December 31, 1997:
(In Thousands of Dollars)
1998 $105,573
1999 20,608
2000 10,310
2001 4,353
2002 and thereafter 10,217
TOTAL $151,061
Following is a summary of certificates of deposit of $100 thousand or
more by remaining maturities as of December 31, 1997.
(In Thousands of Dollars)
Three months or less $11,735
Three to six months 8,159
Six to twelve months 5,225
Over twelve months 5,525
TOTAL $30,644
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
$15.593 million for the year ended December 31, 1997 and $16.925
million for 1996. The market value was $15.709 million for 1997
and $16.923 million for 1996. At December 31, 1997, these
agreements had a weighted average interest rate of 4.43% and
will mature January through March 1998. The securities,
although held in safekeeping outside the bank subsidiary, were
under the bank subsidiary's control. Securities sold under
repurchase agreements averaged monthly $14.887 million in 1997
and $11.692 million in 1996. Maximum amounts outstanding at any
month end during 1997 and 1996 were $16.211 million and $15.749
million, respectively.
The bank subsidiary has access to borrowing facilities
at the Federal Home Loan Bank, which totaled $13.9 million at
December 31, 1997. At December 31, 1997, the bank had two advances
from the Federal Home Loan Bank in the amounts of $3.074 million at
5.78% and $1.538 million outstanding at 5.97%, both maturing in April
1999, and were 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 $114 thousand for 1997, $125 thousand for
1996 and $121 thousand for 1995. 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, 1997:
(In Thousands of Dollars)
Year ending:
December 31, 1998 $57
December 31, 1999 30
TOTAL $87
The bank subsidiary is required to maintain noninterest-bearing
reserve balances with the Federal Reserve Bank. The average
reserve balance was $6.184 million for 1997.
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.
(In Thousands of Dollars)
CONTRACT OR NOTIONAL AMOUNT
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $14,479
Standby letters of credit
and financial guarantees written $406
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 2.4 million shares, par value $2.50, to 5
million 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). The bank subsidiary received approval from
the Comptroller of the Currency to exceed its maximum amount of
retained earnings available for distribution by $635 thousand.
As of December 31, 1997, the bank subsidiary had $12.133 million
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, 1997, that the bank subsidiary meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, 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:
(In Thousands of Dollars)
Requirement
For Capital
Actual Adequacy Purposes:
Amount Ratio Amount Ratio
As of December 31, 1997
Total Capital
(to Risk-Weighted Assets) $39,215 15.55% $20,181 8.00%
Tier I Capital
(to Risk-Weighted Assets) $36,058 14.29% $10,090 4.00%
Tier I Capital
(to Average Assets) $36,058 9.89% $14,589 4.00%
As of December 31, 1996
Total Capital
(to Risk-Weighted Assets) $37,199 15.34% $19,399 8.00%
Tier I Capital
(to Risk-Weighted Assets) $34,166 14.09% $9,700 4.00%
Tier I Capital
(to Average Assets) $34,166 10.18% $13,424 4.00%
NOTE K - RETIREMENT PLANS
The company has 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. Total contributions to company retirement plans were
$203 thousand, $179 thousand, and $156 thousand for the years
ended December 31, 1997, 1996 and 1995 respectively.
NOTE L - FEDERAL INCOME TAXES
The provision for income taxes (credit) consists of the following:
(In Thousands of Dollars)
Years ended December 31 1997 1996 1995
Current $2,277 $2,000 $1,663
Deferred (77) (70) (13)
TOTALS $2,200 $1,930 $1,650
Following is a reconciliation between federal income taxes at statutory rates and actual taxes based on income before
federal income taxes:
(In Thousands of Dollars)
Years ended December 31 1997 1996 1995
Percent of Percent of Percent of
Amount pretax income Amount pretax income Amount pretax income
Statutory tax $2,429 35% $2,122 35% $1,829 35%
Effect of nontaxable interest (162) (2) (156) (3) (152) (3)
Other (67) (1) (36) 0 (27) 0
ACTUAL TAX $2,200 32% $1,930 32% $1,650 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:
(In Thousands of Dollars)
Years ended December 31 1997 1996 1995
Depreciation $41 $42 $17
Provision for credit losses (78) (98) (58)
Deferred loan fees and origination costs 2 (13) 29
Federal Home Loan Bank dividends 26 0 0
Deferred compensation (67) 0 0
Other (1) (1) (1)
TOTALS ($77) ($70) ($13)
Deferred tax liabilities (assets) are comprised of the following at December 31:
(In Thousands of Dollars)
Deferred tax assets: 1997 1996
Allowance for credit losses ($896) ($818)
Deferred compensation (130) (62)
Deferred loan fee income (59) (134)
Gross deferred tax assets (1,085) (1,014)
Deferred tax liabilities:
Depreciation 481 442
Prepaid loan origination costs 0 50
Mark-to-market adjustment - securities
available for sale 213 56
Federal Home Loan Bank dividends 45 20
Other 0 42
Gross deferred tax liabilities 739 610
($346) ($404)
<FN>
No valuation allowance for deferred tax assets was recorded at December 31, 1997. Federal income taxes applicable to
investment securities gains in 1997 were $2 thousand.
</FN>
NOTE M - LOANS TO RELATED PARTIES
Certain directors, executive officers and associates of such
persons were loan customers during 1997. 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 thousand
during 1997:
(In Thousands of Dollars)
Total loans at December 31, 1996 $1,063
New loans 411
Repayments 621
Total loans at December 31, 1997 $853
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, 1997:
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, 1997 and 1996 are as follows:
(In Thousands of Dollars)
1997 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Financial assets:
Cash and cash equivalents $19,182 $19,182 $18,969 $18,969
Investment securities:
Available for sale 66,620 66,720 45,612 45,859
Other securities 1,686 1,686 1,468 1,468
Loans - Net 271,665 272,442 263,504 263,590
TOTAL FINANCIAL ASSETS $359,153 $360,030 $329,553 $329,886
Financial liabilities:
Deposits $305,830 $306,611 $283,811 $284,578
Securities sold under repurchase agreements 14,659 14,659 15,749 15,749
Short term borrowings 5,171 5,171 2,022 2,022
TOTAL FINANCIAL LIABILITIES $325,660 $326,441 $301,582 $302,349
Unrecognized financial instruments:
Commitments to extend credit $14,479 $14,479 $9,791 $9,791
Standby letters of credit and financial guarantees 406 406 237 237
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.
(In Thousands of Dollars)
December 31, 1997 December 31, 1996
BALANCE SHEETS
Assets:
Cash $5,186 $1,197
Receivables 8 8
Investment in bank subsidiary 36,373 34,506
Other securities 54 0
$41,621 $35,711
Liabilities:
Accounts payable $1,112 $1,010
Stockholders equity:
Common stock 24,792 24,254
Retained earnings 15,717 14,766
Treasury Stock 0 (4,319)
TOTAL STOCKHOLDERS EQUITY 40,509 34,701
$41,621 $35,711
STATEMENTS OF INCOME (In Thousands of Dollars)
Years ended December 31, 1997 December 31, 1996 December 31, 1995
Income:
Equity in net income of subsidiary $4,819 $4,194 $3,622
Other expenses (77) (63) (46)
NET INCOME $4,742 $4,131 $3,576
STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
Years ended December 31, 1997 December 31, 1996 December 31, 1995
Cash flows from operating activities:
Net income $4,742 $4,131 $3,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase (Decrease) in deferred director fees 2 (1) (1)
Income from subsidiary (4,819) (4,194) (3,622)
Dividends received from subsidiary 5,977 6,027 1,267
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,902 5,963 1,220
Cash flows from investing activities:
Investment in subsidiary (3,025) (2,582) (1,875)
Purchase of other investments (54) 0 0
NET CASH USED IN INVESTING ACTIVITIES (3,079) (2,582) (1,875)
Cash flows from financing activities:
Purchase of treasury stock 0 (4,319) 0
Proceeds from sale of treasury stock 2,536 0 0
Dividends paid (1,858) (1,138) (1,168)
Proceeds from sale of common stock 488 2,582 1,875
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,166 (2,875) 707
NET INCREASE IN CASH 3,989 506 52
CASH
Beginning of year 1,197 692 640
End of year $5,186 $1,197 $692
<FN>
Cash dividends of $5.976 million, $6.027 million and $1.267 million were recevied from the bank subsidiary in 1997,
1996 and 1995, respectively.
</FN>
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
BOARDMAN
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 Rt. 62 Damascus, OH 44619 537-4004