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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended Sept. 30, 1999 Commission file number 2-80339
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FARMERS NATIONAL BANC CORP.
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(Exact name of registrant as specified in its charter)
OHIO 34-1371693
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
20 South Broad Street
Canfield, OH 44406 44406
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(Address of principal executive offices) (Zip Code)
(330) 533-3341
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1999
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Common Stock, No Par Value 7,447,024 shares
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements Page
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Included in Part I of this report:
Farmers National Banc Corp. and Subsidiary
Consolidated Balance Sheets 1
Consolidated Statements of Income and Comprehensive
Income 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 5-10
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PART II - OTHER INFORMATION
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Other Information and Signatures 10-12
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CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
SEPTEMBER 30, DECEMBER 31,
1999 1998
(In Thousands of Dollars)
ASSETS
Cash & due from banks $ 11,706 $ 16,686
Federal funds sold 2,969 5,994
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TOTAL CASH AND CASH EQUIVALENTS 14,675 22,680
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Securities available for sale 73,017 81,664
Other securities 2,765 2,655
Loans 317,239 286,802
Less allowance for credit losses 3,981 3,689
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NET LOANS 313,258 283,113
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Premises and equipment, net 7,978 7,785
Other assets 3,907 3,724
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$ 415,600 $ 401,621
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LIABILITIES AND STOCKHOLDERS EQUITY
Deposits (all domestic):
Noninterest-bearing $ 27,764 $ 29,380
Interest-bearing 294,547 292,138
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TOTAL DEPOSITS 322,311 321,518
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U. S. Treasury interest-bearing demand note 785 72
Securities sold under repurchase agreements 26,930 24,473
Short-term borrowings 1,127 3,647
Long-term borrowings 12,389 1,696
Other liabilities and deferred credits 1,177 2,941
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TOTAL LIABILITIES 364,719 354,347
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Stockholders Equity:
Common Stock - Authorized 12,500,000 shares in 1999
and 5,000,000 in 1998; issued and outstanding
7,447,024 in 1999 and 3,657,288 in 1998 34,207 31,661
Retained earnings 17,231 15,337
Treasury stock, at cost; 5,000 shares (91) 0
Accumulated other comprehensive income (loss) (466) 276
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TOTAL STOCKHOLDERS EQUITY 50,881 47,274
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$ 415,600 $ 401,621
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1999 1998 1999 1998
(In Thousands except Per Share Data)
INTEREST INCOME
Interest and fees on loans $ 6,643 $ 6,286 $ 19,001 $ 18,355
Interest and dividends on securities:
Taxable interest 885 888 2,775 2,667
Nontaxable interest 186 136 525 401
Dividends 43 39 125 97
Interest on federal funds sold 18 65 172 233
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TOTAL INTEREST INCOME 7,775 7,414 22,598 21,753
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INTEREST EXPENSE
Deposits 2,681 2,870 8,030 8,657
Borrowings 460 314 1,195 816
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TOTAL INTEREST EXPENSE 3,141 3,184 9,225 9,473
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NET INTEREST INCOME 4,634 4,230 13,373 12,280
Provision for credit losses 210 210 630 630
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NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 4,424 4,020 12,743 11,650
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OTHER INCOME
Service charges on deposit accounts 301 301 864 882
Investment security gains (losses) (14) 0 (11) 5
Other operating income 121 137 358 393
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TOTAL OTHER INCOME 408 438 1,211 1,280
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OTHER EXPENSES
Salaries and employee benefits 1,415 1,284 4,204 3,849
Net occupancy expense of premises 144 148 431 430
Furniture and equipment expense,
including depreciation 176 136 488 403
Intangible and other taxes 148 134 445 432
Other operating expenses 777 780 2,387 2,254
-------- -------- -------- --------
TOTAL OTHER EXPENSES 2,660 2,482 7,955 7,368
-------- -------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 2,172 1,976 5,999 5,562
FEDERAL INCOME TAXES 689 637 1,899 1,788
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NET INCOME $ 1,483 $ 1,339 $ 4,100 $ 3,774
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized gains (losses) on securities 44 379 (742) 240
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 1,527 $ 1,718 $ 3,358 $ 4,014
======== ======== ======== ========
* NET INCOME PER SHARE $ 0.20 $ 0.19 $ 0.56 $ 0.53
======== ======== ======== ========
*Adjusted to reflect weighted average shares outstanding
and 2-for-1 stock split, without audit and before adjustments.
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CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY SEPTEMBER 30, SEPTEMBER 30,
1999 1998
(In Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES
Interest received $ 23,559 $ 23,285
Fees and commissions received 1,207 1,262
Interest paid (9,285) (9,542)
Cash paid to suppliers and employees (7,674) (6,723)
Income taxes paid (1,944) (1,746)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 5,863 6,536
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale 20,380 10,536
Proceeds from sales of investment securities available for sale 5,216 1,023
Purchases of other securities and securities available for sale (18,710) (14,322)
Net increase in loans made to customers (32,722) (12,366)
Purchases of premises and equipment (568) (803)
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NET CASH USED IN INVESTING ACTIVITIES (26,404) (15,932)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts 4,867 3,844
Net increase in time deposits 245 2,030
Net increase (decrease) in Federal Home Loan Bank borrowings 7,379 (125)
Purchase of Treasury Stock (91) 0
Dividends paid (2,410) (2,138)
Proceeds from sale of common stock 2,546 2,798
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NET CASH PROVIDED BY FINANCING ACTIVITIES 12,536 6,409
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NET DECREASE IN CASH AND CASH EQUIVALENTS (8,005) (2,987)
CASH AND CASH EQUIVALENTS
Beginning of period 22,680 19,182
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End of period $ 14,675 $ 16,195
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RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATIONS
Net income $ 4,100 $ 3,774
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 339 310
Amortization and accretion 1,269 1,728
Provision for credit losses 630 630
Loss (Gain) on sale of investment securities 11 (5)
Decrease (Increase) in prepaid expenses (283) 153
Other (203) (54)
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NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,863 $ 6,536
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FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management Representation:
The financial statements for September 30, 1999 and 1998 have been prepared
by management without audit and, therefore, have not been certified by our
Independent Certified Public Accountants.
In the opinion of the management of the registrant, the accompanying
consolidated financial statements for the nine month period ending September 30,
1999 and 1998 include all adjustments, consisting of only normal recurring
adjustments necessary for a fair statement of the results for the periods.
Stockholders Equity Nine Months Ended
September 30, 1999
(In Thousands of Dollars)
COMMON STOCK
Balance 1/1/99 31,661
68,724 shares sold 2,546
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Balance 9/30/99 34,207
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RETAINED EARNINGS
Balance 1/1/99 15,337
Net Income 4,100
Dividends Declared: $.60 Cash dividends on common
stock (2,206)
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Balance 9/30/99 17,231
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TREASURY STOCK, AT COST
Balance 1/1/99 0
Shares Purchased (91)
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Balance 9/30/99 (91)
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance 1/1/99 276
Net change in unrealized depreciation on debt securities,
net of income taxes (742)
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Balance 9/30/99 (466)
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TOTAL STOCKHOLDERS EQUITY AT 9/30/99 50,881
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Item 2. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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The following financial review presents an analysis of the assets and liability
structure of the Corporation and a discussion of the results of operations for
each of the periods presented in this quarterly report, liquidity, capital and
credit quality. Certain statements in this report that relate to Farmers
National Banc Corp.'s plans, objectives, or future performance may be deemed to
be forward-looking statements within the Private Securities Litigation Reform
Act of 1995. Such statements are based on management's current expectations.
Actual strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties.
Results of Operations
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The Corporation's net income for the first nine months of 1999 was $4.1
million, or $.56 per share, which is a 8.64% increase compared with the $3.774
million, or $.53 per share earned during the same period last year. Return on
average assets and return on average equity for the first nine months of 1999
were 1.34% and 11.21% respectively, compared to 1.34% and 11.72% for the same
period in 1998.
The increase in net income for the first nine months of 1999 was primarily
the result of an increase in net interest income. The Corporation's net interest
income increased $1.093 million, or 8.90% from $12.280 million for 1998 to
$13.373 million for the same period in 1999. Interest income on loans and
investment securities is up 3.88% compared to the first nine months of last
year. Some of this increase is a result of the growth in loans outstanding.
Increasing demand in the Corporation's mortgage and installment loan products
has increased average balances in the total loan portfolio by 6.43%. This growth
has contributed to the increase in loan income of $646 thousand or 3.52%. Funds
not used for loan growth have been used to purchase investment securities. The
Corporation's average balance of securities available for sale has increased
16.25% from September, 1998 to September, 1999. This growth has increased income
on securities by $199 thousand or 5.86% over the same time period. Interest
expense on deposits and borrowings is 2.62% lower for the first nine months of
1999 compared to the first nine months of 1998. This cost savings is the result
of an overall decrease in the rates paid on interest-bearing liabilities.
Interest expense on deposits decreased from 3.78% in 1998 to 3.37% in 1999.
Other income, excluding investment security gains and losses, decreased
4.16% from $1.275 million in 1998 to $1.222 million in 1999. The Corporation's
total other expenses for the first nine months of 1999 increased 7.97% from
$7.368 million in 1998 to $7.955 million in 1999. The increase in other
operating expenses is due primarily to asset growth and the increased volume of
the operations of the bank. Management will continue to closely monitor and keep
the increases in noninterest expenses to a minimum.
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Liquidity
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The Corporation maintains, in the opinion of management, liquidity
sufficient to satisfy depositors' requirements and meet the credit needs of
customers. The Corporation depends on its ability to maintain its market share
of deposits as well as acquiring new funds. The Corporation's ability to attract
deposits and borrow funds depends in large measure on its profitability,
capitalization and overall financial condition.
Principal sources of liquidity for the Corporation include assets
considered relatively liquid such as short-term investment securities, federal
funds sold and cash and due from banks.
Cash flows generated from operating activities decreased to $5.863 million
compared to $6.536 million for the same period in 1998. This decrease of $673
thousand is primarily the result of an increase in cash paid to suppliers and
employees. Net cash flows used in investing activities amounted to $26.404
million. Most of these funds were used to fund loans made to customers, which
increased $30.437 million since December 31, 1998.
Net cash flows provided by financing activities were $12.536 million in
1999 compared to $6.409 million in 1998. $5.112 million of these funds in 1999
and $5.874 million in 1998 were generated from increases in customer deposits.
$7.379 million in Federal Home Loan Bank borrowings in 1999 were used to fund
some of the increase in loans made to customers.
Capital Resources
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The capital management function is a continuous process which consists of
providing capital for both the current financial position and the anticipated
future growth of the Corporation. As of September 30, 1999, the corporation's
total risk-based capital ratio stood at 18.70%, and the Tier I risk-based
capital ratio and Tier I leverage ratio were at 17.45% and 12.29%, respectively.
Regulations established by the Federal Deposit Insurance Corporation Improvement
Act require that for a bank to be considered well capitalized, it must have a
total risk-based capital ratio of 10%, a Tier I risk-based capital ratio of 6%
and a Tier I leverage ratio of 5%.
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Loan Portfolio
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The following shows the composition of loans at the dates indicated:
(In Thousands of Dollars)
Sept. 30, Dec. 31,
1999 1998
Commercial, financial and agricultural 11,080 10,885
Residential mortgage loans 119,179 113,547
Nonresidential mortgage loans 47,913 44,371
Installment loans to individuals 139,067 117,999
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Total loans 317,239 286,802
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The following table sets forth aggregate loans in each of the following
categories for the dates indicated:
(In Thousands of Dollars)
Sept. 30, Dec. 31,
1999 1998
Loans accounted for on a nonaccrual basis 357 576
Loans contractually past due 90 days or
more as to interest or principal payments
(not included in nonaccrual loans above) 351 435
Loans considered troubled debt restructurings
(not included in nonaccrual or contractually
past due above) 0 0
Management knows of no loans not included in the table above where serious doubt
exists as to the ability of the borrower to comply with the current loan
repayment terms.
The following shows the amounts of contracted interest income and interest
income reflected in income on loans accounted for on a nonaccrual basis and
loans considered troubled debt restructuring for the periods indicated:
(In Thousands of Dollars)
Sept. 30, Dec. 31,
1999 1998
Gross interest that would have been recorded
if the loans had been current in accordance
with their original terms 22 27
Interest income included in income on the loans 4 1
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Risk Elements (Continued)
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A loan is placed on a nonaccrual basis whenever sufficient information is
received to question the collectibility of the loan. Generally, once a loan is
placed on a nonaccrual basis, interest that may be accrued and not collected on
the loan is charged against earnings.
As of Sept. 30, 1999, there were no concentrations of loans exceeding 10% of
total loans which are not disclosed as a category of loans. As of that date
also, there are no other interest-earning assets that are either nonaccrual,
past due or restructured.
Summary of Credit Loss Experience
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The following is an analysis of the allowance for credit losses for the periods
indicated:
(In Thousands of Dollars)
Nine Months Year
Ended Ended
Sept. 30, Dec. 31,
1999 1998
----- -----
Balance at beginning of period 3,689 3,429
Loan losses:
Commercial, financial & agricultural (27) (63)
Real estate - mortgage (75) (39)
Installment loans to individuals (438) (772)
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(540) (874)
Recoveries on previous loan losses:
Commercial, financial & agricultural 12 0
Real estate - mortgage 8 9
Installment loans to individuals 182 285
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202 294
Net loan losses (338) (580)
Provision charged to operations (1) 630 840
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Balance at end of period 3,981 3,689
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Ratio of net credit losses to average net
loans outstanding .15% .21%
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Summary of Credit Loss Experience (cont'd)
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(1) The provision for possible credit losses charged to operating expense is
based on management's judgment after taking into consideration all factors
connected with the collectibility of the existing loan portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and volume of the loan portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operating expenses include previous credit loss experience, the
status of past due interest and principal payments, the quality of financial
information supplied by loan customers and the general condition of the
industries in the community to which loans have been made.
The allowance for possible credit losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans as of the dates
indicated.
(In Thousands of Dollars)
Sept. 30, Dec. 31,
Types of Loans 1999 1998
- -------------- ----- -----
Commercial, financial & agricultural 745 812
Real estate - mortgage 1,163 1,017
Installment 2,073 1,860
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Total 3,981 3,689
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The allocation of the allowance as shown above should not be interpreted as an
indication that charge-offs in 1999 will occur in the same proportions or that
the allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories since the total allowance is a
general allowance applicable to the entire portfolio.
The percentage of loans in each category to total loans is summarized as
follows:
Sept. 30, Dec. 31,
Types of Loans 1999 1998
- -------------- ----- -----
Commercial, financial & agricultural 3.5% 3.8%
Residential mortgage loans 37.6% 39.6%
Nonresidential mortgage loans
15.1% 15.5%
Installment loans to individuals 43.8% 41.1%
----- -----
100.0% 100.0%
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Year 2000
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The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Corporation's
programs that have time sensitive software may recognize the date as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Federal Financial Institutions Examination Council
recognizes five phases that banks must complete to achieve Year 2000 readiness:
1) Awareness of the potential risks associated with Year 2000; 2) Assessment of
all information and environmental systems needing enhancements; 3) Renovation of
the systems that are not Year 2000 ready; 4) Validation of the renovated systems
to assure Year 2000 readiness; and 5) Implementation of the renovated product
into the ongoing operations. The Corporation has completed the Awareness,
Assessment, Renovation, Validation and Implementation phases of its mission
critical systems for year 2000 readiness. At this time it is not expected that
expenses to address year 2000 issues will materially impact future operating
results. The Corporation has prepared, tested and continues to test a year 2000
contingency plan to address the possible risks that may be faced within and
outside of the Corporation's control.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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There are no material changes from the end of the preceding fiscal year that
would cause additional disclosure of the bank's exposure to market risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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There are no material pending legal proceedings to which the registrant or
its subsidiary is a party, or of which any of their property is the subject,
except proceedings which arise in the ordinary course of business. In the
opinion of management, pending legal proceedings will not have a material effect
on the consolidated financial position of the registrant and its subsidiary.
Item 2. Changes in Securities
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Not applicable.
Item 3. Defaults Upon Senior Securities
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Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
Item 5. Other Information
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Not applicable.
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibits are filed or incorporated by references as part of
this report:
2. Not applicable.
3(i). Not applicable.
3(ii). Not applicable.
4. The registrant agrees to furnish to the Commission upon request copies
of all instruments not filed herewith defining the rights of holders
of long-term debt of the registrant and its subsidiaries.
10. Not applicable.
11. Not applicable.
15. Not applicable.
18. Not applicable.
19. Not applicable.
22. Not applicable.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule (filed herewith)
99. Not applicable.
(b) - Reports on Form 8-K
No reports on Form 8-K were filed for the nine months ended September 30,
1999.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMERS NATIONAL BANC CORP.
Dated: 11-3-99
/s/ Frank L. Paden
- ------------------------------------
Frank L. Paden
President and Secretary
Dated: 11-3-99
/s/ Carl D. Culp
- ------------------------------------
Carl D. Culp
Executive Vice President
and Treasurer
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