Farmers National Banc Corp. Annual Report 2018

FY2018 Annual Report · Farmers National Banc Corp.

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Farmers National Banc Corp.

20 South Broad Street P.O. Box 555 Canfield, Ohio 44406

F A R M E R S N A T I O N A L B A N C C O R P. | A N N U A L R E P O R T 2 0 1 8

A N N U A L R E P O R T 2 0 1 8

Corporate Profile

Farmers National Banc Corp. (the “Company”) is a multi-bank holding company registered
under the Bank Holding Company Act of 1956, as amended. The Company provides full banking
services through its nationally chartered subsidiary, The Farmers National Bank of Canfield
(“Farmers National Bank”.) The Company provides trust services through its subsidiary, Farmers
Trust Company, retirement planning and consultancy services through its subsidiary, National
Associates, Inc. and insurance services through Farmers National Bank’s subsidiaries, Farmers
National Insurance, LLC, and Bowers Insurance Agency, LLC. Farmers Trust Company has a
state-chartered bank license to conduct trust business from the Ohio Department of Commerce
– Division of Financial Institutions.

Farmers National Bank, chartered in 1887, is a full-service financial services company engaged
in commercial and retail banking with a total of forty-one (41) locations and four (4) trust offices
located in the counties of Mahoning, Trumbull, Columbiana, Stark, Summit, Wayne, Medina,
Holmes and Cuyahoga in the State of Ohio and Beaver in Pennsylvania. In addition, Farmers
National Bank provides 24-hour access to a network of Automated Teller Machines and offers
online, mobile and telephone banking services. Farmers National Bank competes with state
and national banks, as well as with a large number of other financial institutions, such as thrifts,
insurance companies, consumer finance companies, credit unions and commercial finance
leasing companies for deposits, loans and other financial service businesses. The principal
methods by which Farmers National Bank competes are loan interest rates, the rates paid for
funds, the fees charged for services and the availability of services.

As a national banking association, Farmers National Bank is a member of the Federal Reserve
System, is subject to the supervision and regulation of the Office of the Comptroller of the
Currency, and deposits are insured by the Federal Deposit Insurance Corporation to the extent
provided by law.

Forward Looking Statements

Cautionary Note Regarding Forward Looking Statements: This report and the following letter
from our President & Chief Executive Officer contains “forward looking statements” within
the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act
of 1995. For a discussion of factors that could cause future results to differ from historical
performance or those forward-looking statements, see “Cautionary Note Regarding Forward
Looking Statements” on page 30, “Supervision and Regulation” on page 3, and “Item 1A. Risk
Factors” on page 12 of the attached Annual Report on Form 10-K for the year ended December
31, 2018 and recent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed
with the SEC, which are available on the SECs website at www.sec.gov.

Investor Information

Corporate Headquarters:

Farmers National Banc Corp.

20 South Broad Street, P.O. Box 555

Canfield, OH 44406

Phone 330-533-3341

Toll Free 1-888-988-3276

Website: www.farmersbankgroup.com

Dividend Payments: Subject to the approval of the

Board of Directors, quarterly cash dividends are

customarily payable on or about the 30th day of

March, June, September and December.

Transfer Agent: Computershare Investor Services

P.O. Box 30170, College Station, TX 77842

Dividend Reinvestment Plan (DRIP): Registered

shareholders can purchase additional common

shares through Farmers’ Dividend Reinvestment Plan.

Participation is voluntary and allows for automatic

reinvestment of cash dividends and the safekeeping

of share certificates. To obtain a prospectus, contact

the Computershare Investor Services at 877-581-5548.

Direct Deposit of Cash Dividends: The direct

deposit program, which is offered at no charge,

provides for automatic deposit of quarterly dividends

directly to a checking or savings account. For

information regarding this program, please contact

the Computershare Investor Services at 877-581-5548.

Annual Report on Form 10-K: A copy of the Annual

Report on Form 10-K filed with the Securities and

Exchange Commission will be available on the

Company’s website or hard copies will be provided

free of charge to any shareholder on request to the

attention of: Mr. Carl D. Culp, Farmers National

Banc Corp., 20 South Broad Street, P.O. Box 555,

Canfield, OH 44406.

Common Stock Listing and Information as to

Stock Prices and Dividends:

The Company’s common shares trade on the

NASDAQ Capital Market under the symbol FMNB.

Set forth in the accompanying table are per share

prices at which common shares have actually been

purchased and sold in transactions during the

periods indicated, to the knowledge of the Company.

Also included in the table are dividends per share

paid on the outstanding Company’s common shares

and any shares dividends paid. As of December 31,

2018, there were 27,791,901 shares outstanding and

3,366 shareholders of record of common shares.

The following graph compares the cumulative five year total return

to shareholders on Farmers National Banc Corp.’s common shares

relative to the cumulative total returns of the NASDAQ Composite

index, the NASDAQ Bank index and the SNL Microcap Bank

index. The graph assumes that the value of the investment in the

Company’s common shares and in each of the indexes (including

reinvestment of dividends) was $100 on 12/31/2013 and tracks

it through 12/31/2018.

Quarter EndingHighLowDividendMarch 2018June 2018September 2018December 2018March 2017June 2017September 2017December 2017$14.90$15.25$15.65$15.95$12.13$12.65$12.90$13.35$0.05$0.05$0.06$0.06$15.90 $16.75 $16.90 $15.48 $12.80 $13.56 $14.95 $11.56 $0.07 $0.07 $0.08 $0.08 MARKET AND DIVIDEND SUMMARY Period EndingIndex 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18Farmers National Banc Corp. 100.00 129.47 135.31 226.89 239.44 211.15NASDAQ Composite Index 100.00 114.75 122.74 133.62 173.22 168.30SNL U.S. Bank NASDAQ Index 100.00 103.57 111.80 155.02 163.20 137.56SNL Microcap Bank Index 100.00 113.41 126.11 155.04 189.67 179.97Source: S&P Global Market Intelligence © 2019 5010015020025012/31/1312/31/1412/31/1512/31/1612/31/1712/31/18Index ValueTotal Return PerformanceFarmers National Banc Corp.NASDAQ Composite IndexSNL U.S. Bank NASDAQ IndexSNL Microcap Bank IndexFinancial Highlights

(Amounts in Thousands Except for Per Share Data)

For the Year
Net Income
Return on Average Assets
Return on Average Equity
Cash Dividends

Per Share
Net Income (Basic)
Net Income (Diluted)
Book Value at Year-end

Balances at Year-End
Total Assets
Earning Assets
Total Deposits
Net Loans
Total Stockholders’ Equity

2018
$32,569
1.46%
13.13%
8,315

2017
$22,711
1.09%
9.92%
6,012

2016
$20,557
1.07%
9.72%
4,324

$1.18
1.16
9.44

$0.82
0.82
8.79

$0.76
0.76
7.88

$2,328,730
2,076,969
1,799,720
1,722,248
262,320

$2,159,069
1,998,245
1,604,719
1,565,066
242,074

$1,966,113
1,819,455
1,524,756
1,416,783
213,216

Common Shares Outstanding

27,792

27,544

27,048

Annual Meeting Notice
The Annual Meeting of Shareholders will be held at Farmers National Banc Corp. corporate offices

located at 20 S. Broad Street, Canfield, Ohio 44406 at 10:00 a.m. Eastern Time on Thursday, April 18, 2019.

You may also attend the meeting via the internet at www.meetingcenter.io/257959543.

ANNUAL REPORT 2018

Reaching new heights...exceeding expectations.

Dear Fellow Shareholders,

Trying to dispel the
notion that his brilliant
success was the
product of rarified
genius rather than
enduring diligence,
t h e r e n o w n e d
a r c h i t e c t F r a n k
Lloyd Wright once
remarked, “I know the
price of success: dedication, hard work and an
unremitting devotion to the things you want to
see happen.”

The success of Farmers National Bank’s
performance this year came in a similar fashion:
unremitting devotion by your Company and its
people to the highest standards of performance
on a daily basis. The reward for this diligence:
recognition as the number one performing
community bank in Ohio and one of the top 30
community banks in the nation.

In the vernacular of the Japanese business
philosophy of continuous improvement called
KAIZEN that your Company has newly embraced
(an approach deployed by Toyota among many
other global companies), not a day should go by
without some kind of improvement being made
somewhere in the Company. The result of these
continuous improvements within your Company
are what eventually added up to achievements
such as 2018’s historically high numbers in both
net income and cash dividends.

Just to put 2018’s historical numbers in the proper
context, it’s worthwhile to note that in 1887, the
year your Company was founded: Buffalo Bill’s
Wild West Show was all the rage, the gramophone
had just been invented, Grover Cleveland was
President, and America was comprised of only 38
states. Also, in terms of the financial “technologies”
available to our founders, the punch card
calculator was invented but not yet in use.

The significance of this year’s performance – and
of your Company’s enduring strengths and ability
to adapt and evolve with the times – should be
seen in the light of Farmers’ impressive longevity.

Top Performing Bank
In addition to the Company’s positive metrics and
financials, I am thrilled to share that Bank Director
Magazine, a national publication for financial
professionals, has named Farmers the number-
one performing bank in all of Ohio and the 30th
top performing bank in America among publicly-
traded banks with assets between $1 billion
and $5 billion. I wish to thank our shareholders,
leadership team, valued associates and our ever-
growing customer base for their contributions to
this unprecedented achievement of historical
highs in both net income, a 43% increase, and
cash dividends, a 36% increase.

Sustained Dividend Growth
Your Company has an established history of
sharing our success with our valued shareholders.
For over 35 years and counting, Farmers National
Banc Corp. has paid a dividend, including through
the 2008 recession, indicative of our enduring
quest to maintain strong capital-to-asset ratios
in every economy. We are also committed to
continuing our practice of returning capital to
shareholders through our quarterly cash dividend
payment.

I am particularly pleased with the increase
over the past three years in our cash dividend.
Farmers’ dividend has increased at a compound
annual growth rate of 35.7% since 2015. In 2018,
our Company paid a total of $0.30 per share in
dividends, which is an increase of 36.4% from
2017. According to Bloomberg Financial, in 2018
we had the 34th highest dividend improvement
in the NASDAQ Bank Index, and the 7th best
dividend increase for public companies domiciled
in the State of Ohio.

Wealth Management 360 and The Trust
Company
Interest rate fluctuations have made earning

fee income a top priority for our Company. I

am therefore pleased to share that growing fee

income via our Wealth Management offerings

continues to be a successful focus for your

Company. An emphasis on the “quarterbacking”

role of Farmers Private Bankers led rebranding

of Farmers’ Wealth Division into what is now

Farmers Wealth Management 360, accented by

our message to our valued clients: “Be Intentional

About Your Worth.”

This comprehensive approach to a client’s full

range of financial needs allows Private Bankers to

grow the banking relationship in all directions with

services from Farmers Trust Company, Farmers

National Insurance, National Associates, Inc. and

Farmers National Investments. When including

Private Banking, this approach grew Wealth

Management 360 revenue by an impressive

13.2% in 2018.

I want to especially highlight the performance

of the Farmers Trust Company, which despite

a challenging equity market environment

experienced another record year of growth in

2018. Revenues grew by 11% compared to

2017 to a record level of $7.1 million, as net

operating earnings grew by 47%.

It would be difficult for me to over-emphasize to

you the role the expertise and character of our

Trust professionals has played in this growth.

Their strong relationships with our clients and

COI’s (Centers of Influence), as well as our

commitment to the markets we serve, are a

powerful combination. Farmers Trust is committed

to being recognized as the premier fiduciary

and independent investment manager in our

geographic footprints.

ANNUAL REPORT 2018Loan Growth
Providing access to capital to the entrepreneurs,
small businesses and homeowners who are the
economic drivers of the geographic footprints
we serve is the true north of our mission as a
community bank.

I am pleased to say that 2018 was another
outstanding year for loan growth, at just over
10% year over year. All areas of our diverse loan

portfolio showed strong loan growth in 2018 with
Agricultural Lending leading the way at 14%. Our
Small Business Express loans, which are typically
less than $400,000, can be closed within as little as
24 hours; balances grew for this program by 36%.
Indirect auto loans and commercial dealer loans
experienced strong growth and added diversity
to our loan book. Asset quality also continued
to improve, with non-performing assets and
early stage delinquencies as of 12-31-2018 both
decreasing from 12-31-2017.

We are pleased with the success of our strategy of
capitalizing on opportunities within our traditional
footprint created by the de-emphasis of lending
in these areas by larger regional banks. We
also continued to show success in our new
loan production offices in Beaver, PA and

Beachwood, OH with some of our most successful
lenders working from those offices.

-
Residential Real Estate loans increased 5% year
over year even as higher rates limited mortgage

refinance activities. Our residential mortgage
department continues to succeed as a result of a
knowledgeable sales staff as well as professionals
our closing department who continue to provide
in
industry leading service levels of just over 30 days
from application to closing. The new Farmers
Mobile Mortgage App continues to grow in
adoption, adding value to the mortgage process
at Farmers.

Culture and Strategy
In business circles today, one frequently hears
and reads that “Culture Trumps Everything.” The
intent is not to negate that strategy is primary to a
company’s success. Simply put, the successful
–
carrying out of a strategy – however well
conceived – is entirely dependent upon the people
and created culture of an organization.

Just as we encourage our wealth management
customers to “Be Intentional About Your Worth,”
your executive leadership is also intentional
about developing a game-changing culture

within Farmers. This past year, Farmers’ high
performing Farmers Academy class implemented
the Japanese “KAIZEN” model of creating a
workplace that celebrates open-mindedness to
create a lean and purposeful culture. With this
philosophy in mind, the Academy and the Bank
also implemented an internal program called
the “Farmers Market” where employees can
share their ideas to improve processes, generate
revenue, institute a cost save, or improve a
customer experience.

I hope you share my enthusiasm for our Company’s
record-breaking achievements over the past year.
As always, we are grateful for what we have
achieved, but the focus of our attention is on
the future. We remain committed to continual
improvement and to pushing ourselves to beat
our last, best performance. I thank you for your
continued support and confidence in your
Company, its leadership and strategic vision.

Sincerely,

Kevin J. Helmick
President & Chief Executive Officer

ANNUAL REPORT 2018Top Row from Left to Right: Ralph D. Macali, Gregg Strollo, Terry A. Moore, Anne Frederick Crawford, Gregory C. Bestic,
David Z. Paull and Earl R. Scott

Bottom Row from Left to Right: Edward W. Muransky, Kevin J. Helmick, Lance J. Ciroli and James R. Smail

Board of Directors

Lance J. Ciroli 4, 5
Chairman of the Board
Co-founder of NBE Bank Consulting
Services. Retired Assistant Deputy
Comptroller in the Cleveland/Detroit
Field Office, Office of the Comptroller
of the Currency

James R. Smail 2, 4, 5
Vice Chairman of the Board
Chairman, Director and CEO
J.R. Smail, Inc.

Gregory C. Bestic 1, 3
CPA, CGMA, Certified Forensic Accountant,
DABFA, FACFEI
Principal with Schroedel, Scullin & Bestic,
LLC - Certified Public Accountants and
Strategic Advisors

Anne Frederick Crawford 2, 3
Attorney-at-Law
Self-employed/Sole Proprietor

Kevin J. Helmick 5
President and Chief Executive Officer
Farmers National Bank

Ralph D. Macali 1, 3
Vice President of Palmer J. Macali, Inc.
Partner in P.M.R.P. Partnership

Terry A. Moore 2, 3, 5
Managing Director of Krugliak, Wilkins,
Griffiths and Dougherty

David Z. Paull 2, 4
Retired Vice President, Human Resources
Operations and Labor Relations, RTI
International Metals, Inc.

Earl R. Scott 6
Certified Public Accountant (CPA) and
Principal, Packer Thomas

Gregg Strollo 1, 4
Partner, Architect and President,
Strollo Architects

Edward W. Muransky 3, 4
CEO, Chestnut Land Company

1 Audit Committee
2 Compensation Committee
3 Corporate Governance and Nominating Committee
4 Board Enterprise Risk Management Committee
5 Executive Committee
6 Mr. Scott retired from the Board and its committees

on July 17, 2018

ANNUAL REPORT 2018

Farmers National Banc Corp. Officers

Kevin J. Helmick,
President and Chief Executive Officer

Carl D. Culp,
Senior Executive Vice President, Secretary & Treasurer

Management Team and Board of Directors

Kevin J. Helmick,
President and Chief
Executive Officer
Farmers National Bank

Mark Witmer,
Senior Executive
Vice President and
Chief Banking Officer
Farmers National Bank

Carl D. Culp,
Senior Executive
Vice President,
Cashier and Chief
Financial Officer
Farmers National Bank

Mark L. Graham,
Executive Vice
President, Chief
Credit Officer
Farmers National Bank

Amber Wallace,
Executive Vice President,
Chief Retail and
Marketing Officer
Farmers National Bank

Mark J. Wenick,
Executive Vice President,
Chief Wealth
Management Officer
Farmers National Bank

Joseph Gerzina,
Senior Vice President,
Chief Lending Officer,
Regional President-West
Farmers National Bank

Brian E. Jackson,
Senior Vice President,
Chief Information Officer
Farmers National Bank

Mark Nicastro,
Senior Vice President,
Chief Human
Resources Officer
Farmers National Bank

Timothy Shaffer,
Senior Vice President,
Regional President-East
Farmers National Bank

Michael Oberhaus,
Vice President,
Chief Risk Officer
Farmers National Bank

ANNUAL REPORT 2018Farmers Main Branch & Headquarters

Farmers National Banking Location

Farmers National Bank Lending Only Locations

LAKE ERIE

Trust /Ret irement Office

National Associates, Inc.

Wealth Management Location

Insurance Location

OHIO

ClevelandWestlakeLodiSevilleDaltonFairlawnAllianceDamascusSalemColumbianaLisbonCalcuttaEast LiverpoolLake MiltonPolandWarrenNilesGirardAustintownCornersburgBoardmanCanfieldCantonMassillonWoosterSmithvilleOrrvilleMt. EatonBig PrairieApple CreekKidronMidlandBeaverOHIOLAKE ERIEPAANNUAL REPORT 2018UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
⌧ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2018

(cid:4)

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-35296

Farmers National Banc Corp.

(Exact name of registrant as specified in its charter)

Ohio
(State or other jurisdiction of
incorporation or organization)

20 South Broad Street, Canfield, Ohio
(Address of principal executive offices)

34-1371693
(I.R.S. Employer
Identification No.)

44406
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Shares, no par value

Name of each exchange on which registered
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No ⌧

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 ⌧ No (cid:4)

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T ((§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ⌧ No (cid:4)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ⌧

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
Non-accelerated filer
Emerging growth company

(cid:4)
(cid:4)
(cid:4)

Accelerated filer
Smaller reporting company

⌧
(cid:4)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:4) No ⌧

As of June 30, 2018, the estimated aggregate market value of the registrant’s common shares, no par value (the only common equity of the registrant), held
by non-affiliates of the registrant was approximately $440.9 million based upon the last sales price as of June 30, 2018 reported on NASDAQ. (The
exclusion from such amount of the market value of the common shares owned by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant).

As of March 1, 2019, the registrant had outstanding 27,790,601 common shares, no par value.

DOCUMENTS INCORPORATED BY REFERENCE

Document
Portions of the registrant’s definitive proxy statement for the 2019
Annual Meeting of Shareholders

Part of Form 10-K
into which
Document is Incorporated
III

FARMERS NATIONAL BANC CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018

TABLE OF CONTENTS

PART I
Business .....................................................................................................................................................

1
Item 1.
Item 1A. Risk Factors ............................................................................................................................................... 12
Item 1B. Unresolved Staff Comments ...................................................................................................................... 21
Properties ................................................................................................................................................... 21
Item 2.
Legal Proceedings...................................................................................................................................... 23
Item 3.
Mine Safety Disclosures ............................................................................................................................ 23
Item 4.

Item 5.

PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.................................................................................................................................................... 24
Selected Financial Data.............................................................................................................................. 25
Item 6.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.................... 30
Item 7.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk ..................................................................... 45
Financial Statements and Supplementary Financial Data.......................................................................... 46
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 107
Item 9.
Item 9A. Controls and Procedures ............................................................................................................................ 108
Item 9B. Other Information ...................................................................................................................................... 108

Item 10. Directors, Executive Officers and Corporate Governance ........................................................................ 109
Item 11. Executive Compensation ........................................................................................................................... 111
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters...... 111
Item 13. Certain Relationships and Related Transactions, and Director Independence .......................................... 112
Item 14. Principal Accountant Fees and Services .................................................................................................... 112

PART III

Item 15. Exhibits, Financial Statement Schedules. .................................................................................................. 112
Item 16. Form 10-K Summary ................................................................................................................................. 112

SIGNATURES

116

PART IV

PART I

Item 1. Business.

General

Farmers National Banc Corp.

Farmers National Banc Corp. (the “Company,” “Farmers,” “we,” “our” or “us”), is a financial holding
company and was organized as a one-bank holding company in 1983 under the laws of the State of Ohio and
registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Amendments to the BHCA
in 1999, allowed for a bank holding company to declare itself a financial holding company and thereby engage in
financial activities, including securities underwriting and dealing, insurance agency and underwriting activities, and
merchant banking activities. The Company made the declaration to become a financial holding company in 2016.
For a bank holding company to be eligible to declare itself a financial holding company, all of the depository
institution subsidiaries must be well-capitalized and well-managed and have satisfactory or better ratings under the
Community Reinvestment Act. The Company operates principally through its wholly-owned subsidiaries, The
Farmers National Bank of Canfield (the “Bank” or “Farmers Bank”), Farmers Trust Company (“Farmers Trust”),
National Associates, Inc. (“NAI”) and Farmers National Captive, Inc. (“Captive”). Farmers National Insurance,
LLC (“Farmers Insurance”) and Farmers of Canfield Investment Co. (“Investments or “Farmers Investments”) are
wholly-owned subsidiaries of the Bank. The Company and its subsidiaries operate in the domestic banking, trust,
retirement consulting, insurance and financial management industries.

The Company’s principal business consists of owning and supervising its subsidiaries. Although Farmers

directs the overall policies of its subsidiaries, including lending practices and financial resources, most day-to-day
affairs are managed by their respective officers. Farmers and its subsidiaries had 453 full-time equivalent
employees at December 31, 2018.

The Company’s principal executive offices are located at 20 South Broad Street, Canfield, Ohio 44406, and its

telephone number is (330) 533-3341. Farmers’ common shares, no par value, are listed on the NASDAQ Capital
Market (the “NASDAQ”) under the symbol “FMNB.” Farmers’ business activities are managed and financial
performance is primarily aggregated and reported in three lines of business, the Bank segment, the Trust segment
and the Retirement Planning/Consulting segment. For a discussion of Farmers’ financial performance for the fiscal
year ended December 31, 2018, see the Consolidated Financial Statements and Notes to the Consolidated Financial
Statements found in Item 8 of this Annual Report on Form 10-K.

The Farmers National Bank of Canfield

During 2017, the Company acquired all outstanding stock of Monitor Bancorp, Inc. (“Monitor”), the holding
company of Monitor Bank. Additional discussion about the acquisition can be found in the Notes to Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K. The Bank is a full-service national banking
association engaged in commercial and retail banking mainly in Mahoning, Trumbull, Columbiana, Wayne, Holmes,
Medina and Stark Counties in Ohio and two locations in Beaver County, Pennsylvania. The Bank’s commercial and
retail banking services include checking accounts, savings accounts, time deposit accounts, commercial, mortgage
and installment loans, home equity loans, home equity lines of credit, night depository, safe deposit boxes, money
orders, bank checks, automated teller machines, internet banking, travel cards, “E” Bond transactions, MasterCard
and Visa credit cards, brokerage services and other miscellaneous services normally offered by commercial banks.

A discussion of the general development of the Bank’s business and information regarding its financial
performance throughout 2018, is discussed in “Management Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7 of this Annual Report on Form 10-K.

The Bank faces significant competition in offering financial services to customers. Ohio has a high density of

financial service providers, many of which are significantly larger institutions that have greater financial resources
than the Bank, and all of which are competitors to varying degrees. Competition for loans comes principally from
savings banks, savings and loan associations, commercial banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. The most direct competition for deposits has
historically come from savings and loan associations, savings banks, commercial banks and credit unions.
Additional competition for deposits comes from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies.

Farmers Trust Company

During 2009, the Company acquired the Farmers Trust. Farmers Trust offers a full complement of personal

and corporate trust services in the areas of estate settlement, trust administration and employee benefit plans.
Farmers Trust operates four offices located in Boardman, Canton, Howland and Wooster, Ohio.

National Associates, Inc.

NAI of Cleveland, Ohio has been a part of the Company since the 2013 acquisition. The acquisition was part

of the Company’s plan to increase the levels of noninterest income and to complement the existing retirement
services that were already being offered through Farmers Trust. NAI operates from its office located in Fairview
Park, Ohio

Farmers National Captive, Inc.

Captive was formed during 2016 and is a wholly-owned insurance subsidiary of the Company that provides
property and casualty insurance coverage to the Company and its subsidiaries. The Captive pools resources with
thirteen similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among
themselves and to provide insurance where not currently available or economically feasible in today’s insurance
market place. The Captive does not account for a material portion of the revenue and, therefore, will not be
discussed individually, but as part of the Company.

Farmers National Insurance, LLC

Farmers Insurance was formed during 2009 and offers a variety of insurance products through licensed

representatives. During 2016, the Bank completed the acquisition of the Bowers Insurance Agency, Inc.
(“Bowers”). The transaction involved both cash and stock. All activity has been merged into Insurance. Farmers
Insurance is a subsidiary of Farmers Bank and does not account for a material portion of the revenue and, therefore,
will not be discussed individually, but as part of the Bank.

Farmers of Canfield Investment Company

Farmers Investments was formed during 2014, with the primary purpose of investing in municipal securities.
Farmers Investments is a subsidiary of Farmers Bank and does not account for a material portion of the revenue and,
therefore, will not be discussed individually, but as part of the Bank.

Investor Relations

The Company maintains an Internet site at http://www.farmersbankgroup.com, which contains an Investor

Relations section that provides access to the Company’s filings with the Securities and Exchange Commission (the
“Commission”). Farmers makes available free of charge on or through its website the Company’s annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such documents filed
or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as
reasonably practicable after the Company has filed these documents with the Commission. In addition, the
Company’s filings with the Commission may be read and copied at the Commission’s Public Reference Room at
100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. These filings are also available on the Commission’s web site at
http://www.sec.gov free of charge as soon as reasonably practicable after the Company has filed the above
referenced reports.

Supervision and Regulation

Introduction

The Company and its subsidiaries are subject to extensive regulation by federal and state regulatory agencies.

The regulation of financial holding companies and their subsidiaries is intended primarily for the protection of
consumers, depositors, borrowers, the Deposit Insurance Fund and the banking system as a whole and not for the
protection of shareholders. This intensive regulatory environment, among other things, may restrict the Company’s
ability to diversify into certain areas of financial services, acquire depository institutions in certain markets or pay
dividends on its common shares. It also may require the Company to provide financial support to its banking and
other subsidiaries, maintain capital balances in excess of those desired by management and pay higher deposit
insurance premiums as a result of the deterioration in the financial condition of depository institutions in general.

Significant aspects of the laws and regulations that have, or could have a material impact on Farmers and its

subsidiaries are described below. These descriptions are qualified in their entirety by reference to the full text of the
applicable statutes, legislation, regulations and policies, as they may be amended or revised by the U.S. Congress or
state legislatures and federal or state regulatory agencies, as the case may be. Changes in these statutes, legislation,
regulations and policies may have a material adverse effect on the Company and its business, financial condition or
results of operations.

Regulatory Agencies

Financial Holding Company. Farmers elected to be a financial holding company. A bank holding company

may elect to become a financial holding company if each of its subsidiary banks is well capitalized under the prompt
corrective action regulations of the FDIC, is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act of 1977 (the “CRA”). Financial holding companies may engage in activities that are
financial in nature, including affiliating with securities firms and insurance companies, which are not otherwise
permissible for a bank holding company.

As a financial holding company, Farmers is subject to regulation under the BHCA and to inspection,

examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve
Board”). The Federal Reserve Board has extensive enforcement authority over financial and bank holding
companies and may initiate enforcement actions for violations of laws and regulations and unsafe or unsound
practices. The Federal Reserve Board may assess civil money penalties, issue cease and desist or removal orders
and may require that a bank holding company divest subsidiaries, including subsidiary banks. Farmers is also
required to file reports and other information with the Federal Reserve Board regarding its business operations and
those of its subsidiaries.

Subsidiary Bank. The Bank is subject to regulation and examination primarily by the Office of the
Comptroller of the Currency (the “OCC”) and secondarily by the Federal Deposit Insurance Corporation (the
“FDIC”). OCC regulations govern permissible activities, capital requirements, dividend limitations, investments,
loans and other matters. The OCC has extensive enforcement authority over Farmers Bank and may impose
sanctions on Farmers Bank and, under certain circumstances, may place Farmers Bank into receivership.

Farmers Bank is also subject to certain restrictions imposed by the Federal Reserve Act and Federal Reserve

Board regulations regarding such matters as the maintenance of reserves against deposits, extensions of credit to
Farmers or any of its subsidiaries, investments in the stock or other securities of Farmers or its subsidiaries and the
taking of such stock or securities as collateral for loans to any borrower.

Non-Banking Subsidiaries. Farmers’ non-banking subsidiaries are also subject to regulation by the Federal

Reserve Board and other applicable federal and state agencies. In particular, Farmers Insurance is subject to
regulation by the Ohio Department of Insurance, which requires, amongst other things, the education and licensing
of agencies and individual agents and imposes business conduct rules.

Securities and Exchange Commission and The NASDAQ Stock Market LLC. The Company is also under the

regulation and supervision of the Commission and certain state securities commissions for matters relating to the
offering and sale of its securities. The Company is subject to disclosure and regulatory requirements of the
Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act, and the regulations promulgated
thereunder. Farmers common shares are listed on the NASDAQ under the symbol “FMNB” and the Company is
subject to the rules for NASDAQ listed companies.

Federal Home Loan Bank. Farmers Bank is a member of the Federal Home Loan Bank of Cincinnati (the
“FHLB”), which provides credit to its members in the form of advances. As a member of the FHLB, the Bank must
maintain an investment in the capital stock of the FHLB in a specified amount. Upon the origination or renewal of a
loan or advance, the FHLB is required by law to obtain and maintain a security interest in certain types of collateral.
The FHLB is required to establish standards of community investment or service that its members must maintain for
continued access to long-term advances from the FHLB. The standards take into account a member’s performance
under the CRA and its record of lending to first-time home buyers.

The Federal Deposit Insurance Corporation. The FDIC is an independent federal agency that insures the

deposits, up to prescribed statutory limits, of federally-insured banks and savings associations and safeguards the
safety and soundness of the financial institution industry. The Bank’s deposits are insured up to applicable limits by
the Deposit Insurance Fund of the FDIC and subject to deposit insurance assessments to maintain the Deposit
Insurance Fund.

The FDIC may terminate insurance coverage upon a finding that an insured depository institution has engaged

in unsafe or unsound practices, is in an unsafe or unsound condition, or has violated any applicable law, regulation,
rule, order or condition enacted or imposed by the institution’s regulatory agency.

Dodd-Frank Act - Basel III

In July 2013, the Federal banking regulators approved a final rule to implement the revised capital adequacy

standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant
provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-
based capital requirements, makes selected changes to the calculation of risk-weighted assets and adjusts the prompt
corrective action thresholds. Community banking organizations, such as the Company and the Bank, became
subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of
2015 through 2019.

The final rule:

•

Permits banking organizations that had less than $15 billion in total consolidated assets as of
December 31, 2009 to include in Tier 1 capital trust preferred securities and cumulative perpetual
preferred stock that were issued and included in Tier 1 capital prior to May 19, 2010, subject to a
limit of 25% of Tier 1 capital elements, excluding any non-qualifying capital instruments and
after all regulatory capital deductions and adjustments have been applied to Tier 1 capital.

Establishes new qualifying criteria for regulatory capital, including new limitations on the
inclusion of deferred tax assets and mortgage servicing rights.

Requires a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%.

Increases the minimum Tier 1 capital to risk-weighted assets ratio requirement from 4% to 6%.

Retains the minimum total capital to risk-weighted assets ratio requirement of 8%.

Establishes a minimum leverage ratio requirement of 4%.

Retains the existing regulatory capital framework for 1-4 family residential mortgage exposures.

Permits banking organizations that are not subject to the advanced approaches rule, such as the
Company and the Bank, to retain, through a one-time election, the existing treatment for most
accumulated other comprehensive income, such that unrealized gains and losses on securities
available for sale will not affect regulatory capital amounts and ratios.

•

Implements a new capital conservation buffer requirement for a banking organization to maintain
a common equity capital ratio more than 2.5% above the minimum common equity Tier 1 capital,
Tier 1 capital and total risk-based capital ratios in order to avoid limitations on capital
distributions, including dividend payments, and certain discretionary bonus payments. The capital
conservation buffer requirement will be phased in beginning on January 1, 2016 at 0.625% and
will be fully phased in at 2.50% by January 1, 2019. A banking organization with a buffer of less
than the required amount would be subject to increasingly stringent limitations on such
distributions and payments as the buffer approaches zero. The new rule also generally prohibits a
banking organization from making such distributions or payments during any quarter if its eligible
retained income is negative and its capital conservation buffer ratio was 2.5% or less at the end of
the previous quarter. The eligible retained income of a banking organization is defined as its net
income for the four calendar quarters preceding the current calendar quarter, based on the
organization’s quarterly regulatory reports, net of any distributions and associated tax effects not
already reflected in net income.

Increases capital requirements for past-due loans, high volatility commercial real estate exposures
and certain short-term commitments and securitization exposures.

Expands the recognition of collateral and guarantors in determining risk-weighted assets.

Removes references to credit ratings consistent with the Dodd Frank Act and establishes due
diligence requirements for securitization exposures.

Various legislation affecting financial institutions and the financial industry will likely continue to be
introduced in Congress, and such legislation may further change banking statutes and the operating environment of
the Company in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit
or expand permissible activities or affect the competitive balance depending upon whether any of this potential
legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the
financial condition or results of operations of the Company or any of its subsidiaries.

Also, such statutes, regulations and policies are continually under review by Congress and state legislatures

and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic
and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the
Company could have a material effect on the business of the Company.

Financial Holding Company Regulation

As a financial holding company, Farmers’ activities are subject to extensive regulation by the Federal Reserve

Board under the BHCA. Generally, in addition to the BHCA limits of banking, managing or controlling banks and
other activities that the Federal Reserve Board has determined to be closely related to banking, financial holding
company activities may include securities underwriting and dealing, insurance agency and underwriting activities
and merchant banking activities. Under Federal Reserve Board policy, a financial holding company is expected to
serve as a source of financial and managerial strength to each subsidiary and to commit resources to support those
subsidiaries. Under this policy, the Federal Reserve Board may require the company to contribute additional capital
to an undercapitalized subsidiary and may disapprove of the payment of dividends to the holding company’s
shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound
practice. The Dodd-Frank Act codified this policy as a statutory requirement.

The BHCA requires prior approval by the Federal Reserve Board for a bank holding company to directly or
indirectly acquire more than a 5.0% voting interest in any bank or its parent holding company. Factors taken into
consideration in making such a determination include the effect of the acquisition on competition, the public benefits
expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis and
the acquiring institution’s record of addressing the credit needs of the communities it serves.

The BHCA also governs interstate banking and restricts Farmers’ nonbanking activities to those determined

by the Federal Reserve Board to be financial in nature, or incidental or complementary to such financial activity,
without regard to territorial restrictions. Transactions among the Bank and its affiliates are also subject to certain
limitations and restrictions of the Federal Reserve Board, as described more fully under the caption “Dividends and
Transactions with Affiliates” in this Item 1.

The Gramm-Leach-Bliley Act of 1999 permits a qualifying bank holding company to elect to become a
financial holding company and thereby affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature and not otherwise permissible for a bank holding company. Farmers elected to
become a financial holding company during 2016.

Regulation of Nationally Chartered Banks

As a national banking association, Farmers Bank is subject to regulation under the National Banking Act and

is periodically examined by the OCC. OCC regulations govern permissible activities, capital requirements, dividend
limitations, investments, loans and other matters. Furthermore, Farmers Bank is subject, as a member bank, to
certain rules and regulations of the Federal Reserve Board, many of which restrict activities and prescribe
documentation to protect consumers. Under the Bank Merger Act, the prior approval of the OCC is required for a
national bank to merge with, or purchase the assets or assume the deposits of, another bank. In reviewing
applications to approve merger and other acquisition transactions, the OCC and other bank regulatory authorities
may include among their considerations the competitive effect and public benefits of the transactions, the capital
position of the combined organization, the applicant’s performance under the CRA and fair housing laws, and the
effectiveness of the entities in restricting money laundering activities. In addition, the establishment of branches by
Farmers Bank is subject to the prior approval of the OCC. The OCC has the authority to impose sanctions on the
Bank and, under certain circumstances, may place Farmers Bank into receivership.

The Bank is also an insured institution as a member of the Deposit Insurance Fund. As a result, it is subject to

regulation and deposit insurance assessments by the FDIC.

Dividends and Transactions with Affiliates

The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. The Company’s

principal source of funds to pay dividends on its common shares and service its debt is dividends from Farmers
Bank and its other subsidiaries. Various federal and state statutory provisions and regulations limit the amount of
dividends that Farmers Bank may pay to Farmers without regulatory approval. Farmers Bank generally may not,
without prior regulatory approval, pay a dividend in an amount greater than its undivided profits after deducting
statutory bad debt in excess of the Bank’s allowance for loan losses. In addition, prior approval of the OCC is
required for the payment of a dividend if the total of all dividends declared in a calendar year would exceed the total
of Farmers Bank’s net income for the year combined with its retained net income for the two preceding years.

In addition, Farmers and Farmers Bank are subject to other regulatory policies and requirements relating to the
payment of dividends, including requirements to maintain adequate capital above regulatory minimums. The federal
banking agencies are authorized to determine under certain circumstances that the payment of dividends would be
an unsafe or unsound practice and to prohibit payment thereof. The federal banking agencies have stated that paying
dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice
and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in
the current financial and economic environment, the Federal Reserve Board has indicated that financial holding
companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum
allowable levels, unless both asset quality and capital are very strong. Thus, the ability of Farmers to pay dividends
in the future is currently influenced, and could be further influenced, by bank regulatory policies and capital
guidelines.

The Bank is subject to restrictions under federal law that limit the transfer of funds or other items of value to

the Company and its nonbanking subsidiaries and affiliates, whether in the form of loans and other extensions of
credit, investments and asset purchases or other transactions involving the transfer of value from a subsidiary to an
affiliate or for the benefit of an affiliate. These regulations limit the types and amounts of transactions (including
loans due and extensions of credit) that may take place and generally require those transactions to be on an arm’s-
length basis. In general, these regulations require that any “covered transaction” by Farmers Bank with an affiliate
must be secured by designated amounts of specified collateral and must be limited, as to any one of Farmers or its
non-bank subsidiaries, to 10% of Farmers Bank’s capital stock and surplus, and, as to Farmers and all such non-bank
subsidiaries in the aggregate, to 20% of Farmers Bank’s capital stock and surplus. The Dodd-Frank Act
significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking

organization including, for example, the requirement that the 10% capital limit on covered transactions apply to
financial subsidiaries. “Covered transactions” are defined by statute to include a loan or extension of credit, as well
as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal
Reserve Board) from the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the
acceptance of securities issued by the affiliate as collateral for a loan and the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.

Capital loans from the Company to the Bank are subordinate in right of payment to deposits and certain other

indebtedness of the Bank. In the event of Farmers’ bankruptcy, any commitment by Farmers to a federal bank
regulatory agency to maintain the capital of Farmers Bank will be assumed by the bankruptcy trustee and entitled to
a priority of payment.

The Federal Deposit Insurance Act of 1950, as amended, provides that, in the event of the “liquidation or other

resolution” of an insured depository institution such as the Bank, the insured and uninsured depositors, along with
the FDIC, will have priority in payment ahead of unsecured, nondeposit creditors, including the Company, with
respect to any extensions of credit they have made to such insured depository institution.

Capital Adequacy

Both Farmers and Farmers Bank are subject to risk-based capital requirements imposed by their respective
primary federal banking regulator. The Federal Reserve Bank monitors the capital adequacy of Farmers and the
FDIC monitors the capital adequacy of Farmers Bank. The revised risk-based capital requirements applicable to
bank holding companies and insured depository institutions, including the Company and the Bank, to make them
consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) became
effective for the Company and the Bank on January 1, 2015. The Basel III Rules require the maintenance of
minimum amounts and ratios of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets,
and of tier 1 capital to adjusted quarterly average assets.

Under the Basel III Rules, common equity tier 1 capital consists of common stock and paid-in capital (net of

treasury stock) and retained earnings. Common equity tier 1 capital is reduced by goodwill, certain intangible
assets, net of associated deferred tax liabilities, deferred tax assets that arise from tax credit and net operating loss
carryforwards, net of any valuation allowance, and certain other items as specified by the Basel III Rules.

Tier 1 capital includes common equity tier 1 capital and certain additional tier 1 items as provided under the

Basel III Rules.

Basel III Rules allow for insured depository institutions to make a one-time election not to include most
elements of accumulated other comprehensive income in regulatory capital and instead effectively use the existing
treatment under the general risk-based capital rules. The Company and the Bank made this opt-out election in the
first quarter of 2015 to avoid significant variations in the level of capital depending upon the impact of interest rate
fluctuations on the fair value of our investment securities portfolio.

The Basel III Rules also changed the risk-weights of assets in an effort to better reflect credit risk and other

risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate
acquisition, development and construction loans and the unsecured portion of non-residential mortgage loans that
are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused
portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250%
risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital;
and increased risk weights (from 0% to up to 600%) for equity exposures.

The Basel III Rules limit capital distributions and certain discretionary bonus payments if the banking
organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1
capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based
capital requirements. The capital conservation buffer began being phased in on January 1, 2016. When fully phased
in on January 1, 2019, Basel III will require the Bank to maintain: (i) as a newly adopted international standard, a

minimum ratio of Common Equity Tier 1 (“CET1”) to risk-weighted assets of 4.5%, plus a 2.5% capital
conservation buffer (the “CCB”) (which is added to the 4.5% CET1 ratio as that buffer is phased in, which will
effectively result in a minimum ratio of CET1 to risk-weighted assets of 7.0%); (ii) a minimum ratio of Tier 1
capital to risk-weighted assets of 6.0%, plus the CCB (which is added to the 6.0% Tier 1 capital ratio as that buffer
is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% on full implementation); (iii) a minimum
ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the CCB (which is added to
the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5%
upon full implementation); and (iv) as a newly adopted international standard, a minimum leverage ratio of 3.0%,
calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures
(computed as the average for each quarter of the month-end ratios for the quarter).

Prior to January 1, 2015, federal regulatory agencies required the Company and the Bank to maintain

minimum tier 1 and total capital to risk-weighted assets of 4.0% and 8.0%, respectively, and tier 1 capital to average
assets (tier 1 leverage ratio) of at least 4.0%. In order to be considered well capitalized under the rules in effect prior
to January 1, 2015, the Company had to maintain tier 1 and total capital to risk-weighted assets of 6.0% and 10.0%,
respectively, and a leverage ratio of 5.0%. Tier 1 capital consisted of common equity, retained earnings, certain
types of preferred stock, qualifying minority interest and trust preferred securities, subject to limitations, and
excluded goodwill and various intangible assets.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1,
including the deduction of mortgage servicing rights, deferred tax assets dependent upon future taxable income and
significant investments in non-consolidated financial entities if any one such category exceeds 10.0% of CET1 or if
all such categories in the aggregate exceed 15.0% of CET1.

The following is a summary of the other major changes from the current general risk-based capital rule:

•

replacement of the external credit ratings approach to standards of creditworthiness with a
simplified supervisory formula approach;

stricter limitations on the extent to which mortgage servicing assets, deferred tax assets and
significant investments in unconsolidated financial institutions may be included in common equity
tier 1 capital and the risk weight to be assigned to any amounts of such assets not deducted; and

increased risk weights for past-due loans, certain commercial real estate loans and some equity
exposures, and selected other changes in risk weights and credit conversion factors.

Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is
considering further amendments to Basel III, including imposition of additional capital surcharges on globally
systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act requires or permits
federal banking agencies to adopt regulations affecting capital requirements in a number of respects, including
potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the
regulations ultimately applicable to the Company may differ substantially from the currently published final Basel
III framework. Requirements of higher capital levels or higher levels of liquid assets could adversely impact the
Company’s net income and return on equity.

Volcker Rule

In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision

of the Dodd-Frank Act (the “Volcker Rule”). The Volcker Rule places limits on the trading activity of insured
depository institutions and entities affiliated with a depository institution, subject to certain exceptions. The trading
activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such
instrument in order to benefit from short-term price movements or to realize short-term profits. The Volcker Rule
exempts specified U.S. Government, agency and/or municipal obligations, and it exempts trading conducted in
certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a
fiduciary on behalf of customers, to satisfy a debt previously contracted, repurchase and securities lending
agreements and risk-mitigating hedging activities.

The Volcker Rule also prohibits a banking entity from having an ownership interest in, or certain relationships

with, a hedge fund or private equity fund, with a number of exceptions.

The Bank does not engage in any of the trading activities or own any of the types of funds prohibited by the

Volcker Rule.

Prompt Corrective Action

The federal banking agencies have established a system of prompt corrective action to resolve certain of the

problems of undercapitalized institutions. This system is based on five capital level categories for insured
depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized,” and “critically undercapitalized.”

The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a
bank’s capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90
days after it becomes “critically undercapitalized” unless the bank’s primary regulator determines, with the
concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise
may be significantly affected depending on a bank’s capital category. For example, a bank that is not “well
capitalized” generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must
guarantee, in part, specific aspects of the bank’s capital plan for the plan to be acceptable.

Federal law permits the OCC to order the pro rata assessment of shareholders of a national bank whose capital

stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank’s capital stock.
This statute also provides for the enforcement of any such pro rata assessment of shareholders of such national bank
to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock owned by any assessed
shareholder failing to pay the assessment. As the sole shareholder of Farmers Bank, the Company is subject to such
provisions.

Deposit Insurance

Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund

of the FDIC, and Farmers Bank is assessed deposit insurance premiums to maintain the Deposit Insurance Fund.
The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith
and credit of the United States Government. Insurance premiums for each insured institution are determined based
upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal
regulator and other information deemed by the FDIC to be relevant to the risk posed to the Deposit Insurance Fund
by the institution. The assessment rate is then applied to the amount of the institution’s deposits to determine the
institution’s insurance premium.

The FDIC assesses a quarterly deposit insurance premiums on each insured institution based on risk
characteristics of the institution and may also impose special assessments in emergency situations. The premiums
fund the Deposit Insurance Fund (“DIF”). Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the
designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In
March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30,
2010, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on
institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the
former statutory minimum of 1.15%. Although the FDIC’s new rules reduced assessment rates on all banks, they
imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reaches 1.35%. The rules
also provide assessment credits to banks with assets of less than $1 billion for the portion of their assessments that
contribute to the increase of the DRR to 1.35%. The rules further changed the method of determining risk-based
assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on
greater risks pay more for deposit insurance than banks that take on less risk.

In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds
issued by the Financing Corporation, which was established by the government to recapitalize a predecessor to the
DIF. These assessments will continue until the Financing Corporation bonds mature in 2019.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by federally-insured

institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. The FDIC also has the
authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or written agreement entered into with the FDIC. The management of the Bank does not
know of any practice, condition or violation that might lead to termination of deposit insurance.

Fiscal and Monetary Policies

The Company’s business and earnings are affected significantly by the fiscal and monetary policies of the

federal government and its agencies. The Company is particularly affected by the policies of the Federal Reserve
Board, which regulates the supply of money and credit in the United States in order to influence general economic
conditions, primarily through open market operations in U.S. government securities, changes in the discount rate on
bank borrowings and changes in the reserve requirements against depository institutions’ deposits. These policies
and regulations significantly affect the overall growth and distribution of loans, investments and deposits, as well as
interest rates charged on loans and paid on deposits.

The monetary policies of the Federal Reserve board have had a significant effect on operations and results of

financial institutions in the past and are expected to have significant effects in the future. In view of the changing
conditions in the economy, the money markets and activities of monetary and fiscal authorities, Farmers can make
no predictions as to future changes in interest rates, credit availability or deposit levels.

Community Reinvestment Act

The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent

with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit
needs of its market areas by, among other things, providing credit to low and moderate-income individuals and
communities. Depository institutions are periodically examined for compliance with the CRA and are assigned
ratings. In order for a bank holding company to commence any new activity permitted by the BHCA, or to acquire
any company engaged in any new activity permitted by the BHCA, each insured depository institution subsidiary of
the bank holding company must have received a rating of at least “satisfactory” in its most recent examination under
the CRA. Furthermore, banking regulators take into account CRA ratings when considering approval of a proposed
transaction. Farmers received a rating of “satisfactory” in its most recent CRA examination.

Customer Privacy

Farmers Bank is subject to regulations limiting the ability of financial institutions to disclose non-public
information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies
to consumers and, in some circumstances, allow customers to prevent disclosure of certain personal information to a
nonaffiliated third party. These regulations affect how consumer information is transmitted and conveyed to outside
vendors.

Anti-Money Laundering and the USA Patriot Act

The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and

Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) and its related regulations require insured depository
institutions, broker-dealers and certain other financial institutions to have policies, procedures and controls to detect,
prevent, and report money laundering and terrorist financing. The USA Patriot Act and its regulations also provide
for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions,
as well as among financial institutions, for counter-terrorism purposes. Failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the
relevant laws or regulations, could have serious legal and reputational consequences for the institution. In addition,
federal banking agencies are required, when reviewing bank holding company acquisition and bank merger
applications, to take into account the effectiveness of the anti-money laundering policies, procedures and controls of
the applicants.

Corporate Governance

The Sarbanes-Oxley Act of 2002 effected broad reforms to areas of corporate governance and financial

reporting for public companies under the jurisdiction of the Commission. The Company’s corporate governance
policies include an Audit Committee Charter, a Compensation Committee Charter, Corporate Governance and
Nominating Committee Charter and Code of Business Conduct and Ethics. The Board of Directors reviews the
Company’s corporate governance practices on a continuing basis. These and other corporate governance policies
have been provided previously to shareholders and are available, along with other information on Farmers’
corporate governance practices, on the Company’s website at www.farmersbankgroup.com.

As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s chief executive officer and chief
financial officer are each required to certify that the Company’s Quarterly and Annual Reports do not contain any
untrue statement of a material fact. The rules have several requirements, including having these officers certify that:
they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s
internal controls, they have made certain disclosures about the Company’s internal controls to its auditors and the
audit committee of the Board of Directors and they have included information in the Company’s Quarterly and
Annual Reports about their evaluation and whether there have been significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the evaluation.

Executive and Incentive Compensation

In June 2010, the Federal Reserve Board, OCC and FDIC issued joint interagency guidance on incentive
compensation policies (the “Joint Guidance”) intended to ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-
taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk
profile of an organization, either individually or as part of a group, is based upon the key principles that a banking
organization’s incentive compensation arrangements should: (i) provide incentives that do not encourage risk-taking
beyond the organization’s ability to effectively identify and manage risks; (ii) be compatible with effective internal
controls and risk management; and (iii) be supported by strong corporate governance, including active and effective
oversight by the organization’s board of directors.

Pursuant to the Joint Guidance, the Federal Reserve Board will review as part of a regular, risk-focused
examination process, the incentive compensation arrangements of financial institutions such as Farmers. Such
reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and
the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included
in reports of examination and deficiencies will be incorporated into the institution’s supervisory ratings, which can
affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against
an institution if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness, and prompt and effective measures are not being
taken to correct the deficiencies.

On February 7, 2011, the federal banking agencies initially issued jointly proposed rules on incentive-based
compensation arrangements under applicable provisions of the Dodd-Frank Act (the “First Proposed Rules”). The
First Proposed Rules generally apply to financial institutions with $1.0 billion or more in assets that maintain
incentive-based compensation arrangements for certain covered employees.

In May 2016, the federal bank regulatory agencies issued a second joint notice of proposed rules (the “Second

Proposed Joint Rules”) likewise designed to prohibit incentive-based compensation arrangements that encourage
inappropriate risks at financial institutions. The Second Proposed Joint Rules would also apply to covered financial
institutions with total assets of $1 billion or more, but the rules would differ for each of three categories of financial
institutions:

•

Level 1 – institutions with assets of $250 billion or more;

Level 2 – institutions with assets of at least $50 billion and less than $250 billion; and

Level 3 – institutions with assets of at least $1 billion and less than $50 billion.

Farmers would be a Level 3 institution. Some of the requirements would apply only to Level 1 and Level 2

institutions. For all covered institutions, including Level 3 institutions, the proposed rules would:

•

prohibit incentive-based compensation arrangements that are “excessive” or “could lead to
material financial loss;”

require incentive based compensation that is consistent with a balance of risk and reward,
effective management and control of risk, and effective governance; and

require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.

Public companies will also be required, once stock exchanges impose additional listing requirements under the

Dodd-Frank Act, to implement “clawback” procedures for incentive compensation payments and to disclose the
details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous
financial information necessitating a restatement due to material noncompliance with financial reporting
requirements. This clawback policy is intended to apply to compensation paid within a three year look-back
window of the restatement and would cover all executives who received incentive awards.

The Dodd-Frank Act also provides shareholders the opportunity to cast a non-binding vote on executive
compensation practices, imposes new executive compensation disclosure requirements, and contains additional
considerations of the independence of compensation advisors.

Future Legislation

Various and significant legislation affecting financial institutions and the financial industry is from time to

time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may
include proposals to expand or contract the powers of bank holding companies and depository institutions or
proposals to substantially change the financial institution regulatory system. It is likely that the Trump
Administration and the U.S. Congress will pursue and potentially implement legislative or regulatory changes
affecting financial institutions and the financial industry. In 2018, President Trump signed a bill reforming the
Dodd-Frank Act and the Trump Administration has indicated its intent to loosen additional regulations. Such
legislation could change the operating environment for Farmers and its subsidiaries in unpredictable ways, it could
decrease the costs of doing business, expand permissible activities or affect the competitive balance among financial
institutions. With the enactment and the continuing implementation of the Dodd-Frank Act and regulations
thereunder, the nature and extent of future legislative and regulatory changes affecting financial institutions remains
very unpredictable. Farmers cannot predict the scope and timing of any such future legislation and, if enacted, the
effect that it could have on its business, financial condition or results of operations.

Summary

To the extent that the foregoing information describes statutory and regulatory provisions applicable to the

Company or its subsidiaries, it is qualified in its entirety by reference to the full text of those provisions or
agreements. Also, such statutes, regulations and policies are continually under review by the U.S. Congress and
state legislatures as well as federal and state regulatory agencies and are subject to change at any time, particularly
in the current economic and regulatory environment. Any such change in applicable statutes, regulations or
regulatory policies could have a material effect on Farmers and its business, financial condition or results of
operations.

Item 1A. Risk Factors.

The following are certain risk factors that could materially and negatively affect our business, results of
operations, cash flows or financial condition. These risk factors should be considered in connection with evaluating
the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause our
actual results or financial condition to differ materially from those projected in forward-looking statements. The
risks that are discussed below are not the only ones we face. If any of the following risks occur, our business,
financial condition or results of operations could be negatively affected. Additional risks that are not presently
known or that we presently deem to be immaterial could also have a material, adverse impact on our business,
financial condition or results of operations.

Risks Relating to Economic and Market Conditions

Changes in economic, political, and market conditions may adversely affect our industry and our business.

Our success depends in part on national and local economic, political, and market conditions as well as
governmental monetary and other financial policies. Conditions such as inflation, recession, unemployment,
changes in interest rates, money supply, governmental fiscal policies and other factors beyond our control may
adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. Because we have a
significant amount of real estate loans, additional decreases in real estate values could adversely affect the value of
property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy
may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which
would have an adverse impact on our earnings. If during a period of reduced real estate values we are required to
liquidate the collateral securing loans to satisfy the debt or to increase our allowance for loan losses, it could
materially reduce our profitability and adversely affect our financial condition. Moreover, the Financial Accounting
Standards Board may change its requirements for establishing the loan loss allowance. The majority of our loans are
to individuals and businesses in Northeast Ohio. Consequently, further significant declines in the economy in the
area could have a material adverse effect on our business, financial condition or results of operations. It is uncertain
when the negative credit trends in our market will reverse, and, therefore, future earnings are susceptible to further
declining credit conditions in the market in which we operate.

Changes in interest rates could adversely affect our income and financial condition.

Our earnings and cash flow are dependent upon our net interest income. Net interest income is the difference

between the interest income generated by our interest-earning assets (consisting primarily of loans and, to a lesser
extent, securities) and the interest expense generated by our interest-bearing liabilities (consisting primarily of
deposits and wholesale borrowings). Our level of net interest income is primarily a function of the average balance
of our interest-earning assets, the average balance of our interest-bearing liabilities and the spread between the yield
on such assets and the cost of such liabilities. These factors are influenced by both the pricing and mix of our
interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by external factors, such as the
local economy, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market
interest rates.

Interest rates are beyond our control, and they fluctuate in response to general economic conditions and the

policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in
monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of
investments, the generation of deposits and the rates received on loans and investment securities and paid on
deposits. While we have taken measures intended to manage the risks of operating in a changing interest rate
environment, there can be no assurance that such measures will be effective in avoiding undue interest rate risk. See
additional interest rate risk discussion under the Market Risk section found in Item 7A of this Annual Report on
Form 10-K.

Defaults by another larger financial institution could adversely affect financial markets generally.

The commercial soundness of many financial institutions may be closely interrelated as a result of credit,

trading, clearing or other relationships between institutions. As a result, concerns about, or a default or threatened
default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by
other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial
intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which we and
our subsidiaries interact on a daily basis, and therefore could adversely affect our business, financial condition or
results of operations.

Risks Related to Our Business

We extend credit to a variety of customers based on internally set standards and judgment. We manage

credit risk through a program of underwriting standards, the review of certain credit decisions and an on-going
process of assessment of the quality of credit already extended. Our credit standards and on-going process of
credit assessment might not protect us from significant credit losses.

We take credit risk by virtue of making loans, extending loan commitments and letters of credit and, to a

lesser degree, purchasing non-governmental securities. Our exposure to credit risk is managed through the use of
consistent underwriting standards that emphasize “in-market” lending, while avoiding highly leveraged transactions
as well as excessive industry and other concentrations. Our credit administration function employs risk management
techniques to ensure that loans adhere to corporate policy and problem loans are promptly identified. While these
procedures are designed to provide us with the information needed to implement policy adjustments where
necessary, and to take proactive corrective actions, there can be no assurance that such measures will be effective in
avoiding undue credit risk.

We have significant exposure to risks associated with commercial real estate and residential real estate in

our primary markets.

As of December 31, 2018, approximately 65.1% of our loan portfolio consisted of commercial real estate and

residential real estate loans, including real estate development, construction and residential and commercial
mortgage loans. Consequently, real estate-related credit risks are a significant concern for us. The adverse
consequences from real estate-related credit risks tend to be cyclical and are often driven by national economic
developments that are not controllable or entirely foreseeable by us or our borrowers. General difficulties in our real
estate markets have recently contributed to increases in our non-performing loans, charge-offs and decreases in our
income.

Our business depends significantly on general economic conditions in the State of Ohio. Accordingly, the
ability of our borrowers to repay their loans, and the value of the collateral securing such loans, may be significantly
affected by economic conditions in the regions we serve or by changes in the local real estate markets. A significant
decline in general economic conditions caused by inflation, recession, unemployment, acts of terrorism or other
factors beyond our control could have an adverse effect on our business, financial condition or results of operations.

Our indirect lending exposes us to increased credit risks.

A portion of our current lending involves the purchase of consumer automobile installment sales contracts

from automobile dealers located in Northeastern Ohio. These loans are for the purchase of new or late model used
cars. We serve customers over a broad range of creditworthiness, and the required terms and rates are reflective of
those risk profiles. While these loans have higher yields than many of our other loans, such loans involve significant
risks in addition to normal credit risk. Potential risk elements associated with indirect lending include the limited
personal contact with the borrower as a result of indirect lending through dealers, the absence of assured continued
employment of the borrower, the varying general creditworthiness of the borrower, changes in the local economy
and difficulty in monitoring collateral. While indirect automobile loans are secured, such loans are secured by
depreciating assets and characterized by loan to value ratios that could result in us not recovering the full value of an
outstanding loan upon default by the borrower. Delinquencies, charge-offs and repossessions of vehicles in this
portfolio are always concerns. If general economic conditions worsen, we may experience higher levels of
delinquencies, repossessions and charge-offs.

Commercial and industrial loans may expose us to greater financial and credit risk than other loans.

As of December 31, 2018, approximately 17.0% of our loan portfolio consisted of commercial and industrial

loans. Commercial and industrial loans generally carry larger loan balances and can involve a greater degree of
financial and credit risk than other loans. Any significant failure to pay on time by our customers would hurt our
earnings and cause a significant increase in non-performing loans. The increased financial and credit risk associated
with these types of loans are a result of several factors, including the concentration of principal in a limited number
of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing
properties and the increased difficulty of evaluating and monitoring these types of loans. In addition, when

underwriting a commercial or industrial loan, we may take a security interest in commercial real estate, and, in some
instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to
potential financial risks. An increase in non-performing loans could result in a net loss of earnings from these loans,
an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material
adverse effect on our business, financial condition or results of operations.

Our allowance for loan loss may not be adequate to cover actual future losses.

We maintain an allowance for loan losses to cover current, probable incurred loan losses. Every loan we

make carries a certain risk of non-repayment, and we make various assumptions and judgments about the
collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the
loan portfolio, management determines the amount of the allowance for loan losses by considering general market
conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers
relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, which may be beyond our control, and these
losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss
allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses
may not be sufficient to cover losses inherent in our loan portfolio, which will require additions to the allowance.
Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact
on our business, financial condition or results of operations.

We are subject to certain risks with respect to liquidity.

“Liquidity” refers to our ability to generate sufficient cash flows to support our operations and to fulfill our

obligations, including commitments to originate loans, to repay our wholesale borrowings and other liabilities and to
satisfy the withdrawal of deposits by our customers. Our primary source of liquidity is our core deposit base, which
is raised through our retail branch system. Core deposits – savings and money market accounts, time deposits less
than $250 thousand and demand deposits—comprised approximately 93.8% of total deposits at December 31, 2018.
Additional available unused wholesale sources of liquidity include advances from the FHLB, issuances through
dealers in the capital markets and access to certificates of deposit issued through brokers. Liquidity is further
provided by unencumbered, or unpledged, investment securities that totaled $202.4 million at December 31, 2018.
An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets
could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to
finance our activities could be impaired by factors that affect us specifically or the financial services industry in
general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our
business activity due to a market downturn or negative regulatory action against us. Our ability to borrow could also
be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news
and expectations about the prospects for the financial services industry as a whole, as evidenced by recent turmoil in
the domestic and worldwide credit markets.

Our business strategy includes continuing our growth plans. Our business, financial condition or results of

operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to continue pursuing a profitable growth strategy both within our existing markets and in new
markets. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by
companies in significant growth stages of development. We cannot assure that we will be able to expand our market
presence in our existing markets or successfully enter new markets or that any such expansion will not adversely
affect our results of operations. Failure to manage our growth effectively could have a material adverse effect on
our business, future prospects, financial condition or results of operations and could adversely affect our ability to
successfully implement our business strategy. Also, if we grow more slowly than anticipated, our operating results
could be materially adversely affected.

We may experience difficulties in integrating acquired businesses, or acquisitions may not perform as

expected.

We completed the acquisition of Monitor in 2017 and Bowers in 2016. The successful integration of these

acquisitions depends on our ability to manage the operations and personnel of the acquired businesses. Integrating
operations is complex and requires significant efforts and expenses. Potential difficulties we may encounter as part
of the integration process include the following:

•

employees may voluntarily or involuntarily exit the Company because of the acquisitions;

our management team may have its attention diverted while trying to integrate the acquired
companies;

we may encounter obstacles when incorporating the acquired operations into our operations;

differences in business backgrounds, corporate cultures and management philosophies;

potential unknown liabilities and unforeseen increased expenses;

previously undetected operational or other issues; and

the acquired operations may not otherwise perform as expected or provide expected results.

Any of these factors could adversely affect each company’s ability to maintain relationships with customers,
suppliers, employees and other constituencies or our ability to achieve the anticipated benefits of the acquisition or
could reduce each company’s earnings or otherwise adversely affect our business and financial results after the
acquisition.

We may fail to realize all of the anticipated benefits of acquisitions, which could reduce our anticipated

profitability.

We expect that our acquisitions will result in certain synergies, business opportunities and growth prospects,

although we may not fully realize these expectations. Our assumptions underlying estimates of expected cost
savings may be inaccurate or general industry and business conditions may deteriorate. In addition, our growth and
operating strategies for acquired businesses may be different from the strategies that the acquired companies pursued.
If these factors limit our ability to integrate or operate the acquired companies successfully or on a timely basis, our
expectations of future results of operations, including certain cost savings and synergies expected to result from
acquisitions, may not be met.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best

people in most activities in which we engage can be intense, and we may not be able to retain or hire the people we
want or need. In order to attract and retain qualified employees, we must compensate them at market levels. If we
are unable to continue to attract and retain qualified employees, or do so at rates necessary to maintain our
competitive position, our performance, including our competitive position, could suffer, and, in turn, adversely
affect our business, financial condition or results of operations.

Strong competition within our markets could reduce our ability to attract and retain business.

We encounter significant competition from banks, savings and loan associations, credit unions, mortgage
banks, and other financial service companies in our markets. Some of our competitors offer a broader range of
products and services than we can offer as a result of their size and ability to achieve economies of scale. Such
competition includes major financial companies whose greater resources may afford them a marketplace advantage
by enabling them to maintain more numerous banking locations and support extensive promotional and advertising
campaigns. Our ability to maintain our history of strong financial performance and return on investment to
shareholders will depend in part on our continued ability to compete successfully in our market. Our financial
performance and return on investment to shareholders also depends on our ability to expand the scope of available
financial services to our customers. In addition to other banks, competitors include securities dealers, brokers,
investment advisors and finance and insurance companies. The increasingly competitive environment is, in part, a
result of changes in regulation, changes in technology and product delivery systems and the accelerating pace of
consolidation among financial service providers.

Consumers may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to utilize alternative methods to complete financial
transactions that historically have involved banks. For example, consumers can now maintain funds in brokerage
accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of
eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits
and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits
as a source of funds could have a material adverse effect on our business, financial condition or results of operations.

We are exposed to operational risk.

Similar to any large organization, we are exposed to many types of operational risk, including reputational
risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by
employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled
computer or telecommunications systems.

Negative public opinion can result from our actual or alleged conduct in any number of activities, including

lending practices, corporate governance and acquisitions and from actions taken by government regulators and
community organizations in response to those activities. Negative public opinion can adversely affect our ability to
attract and keep customers, and can expose us to litigation and regulatory action.

Given the volume of transactions we process, certain errors may be repeated or compounded before they are

discovered and successfully rectified. Our necessary dependence upon automated systems to record and process our
transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation
of those systems will result in losses that are difficult to detect. We may also be subject to disruptions of our
operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses
or electrical or telecommunications outages), which may give rise to disruption of service to customers and to
financial loss of liability. We are further exposed to the risk that our external vendors may be unable to fulfill their
contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective
employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove
to be inadequate.

Unauthorized disclosure of sensitive or confidential customer information, whether through a data breach

of our computer systems by cyber-attack or otherwise, could severely harm our business.

As part of our financial institution business, we collect, process and retain sensitive and confidential client and
customer information on behalf of our subsidiaries and other third parties. Despite the security measures we have in
place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security
breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other
similar events. If information security is breached, information could be lost or misappropriated, resulting in
financial loss or costs to us or damages to others. Any security breach involving the misappropriation, loss or other
unauthorized disclosure of confidential customer information, whether by us or by our vendors, could severely
damage our reputation, expose us to the risks of litigation and liability, or disrupt our operations, and have a material
adverse effect on our business, financial condition or results of operations. We have not experienced any material
loss relating to a cyber-attack or other information security breach, but there can be no assurance that we will not
suffer such attacks or attempted breaches, or incur resulting losses, in the future. Our risks with respect to these
threats remains heightened due to the evolving sophistication and frequency of such threats. As cyber-attacks and
other attempted information security threats continue to evolve, we may be required to spend significant additional
resources in efforts to modify and enhance our protective measures or in investigating or remediating of security
breaches or vulnerabilities.

We depend on our subsidiaries for dividends, distributions and other payments.

As a financial holding company, we are a legal entity separate and distinct from our subsidiaries. Our
principal source of funds to pay dividends on our common shares is dividends from these subsidiaries. Federal and
state statutory provisions and regulations limit the amount of dividends that our banking and other subsidiaries may
pay to us without regulatory approval. In the event our subsidiaries become unable to pay dividends to us, we may
not be able to pay dividends on our outstanding common shares. Accordingly, our inability to receive dividends
from our subsidiaries could also have a material adverse effect on our business, financial condition and results of
operations. Further discussion of our ability to pay dividends can be found under the caption “Dividends and
Transactions with Affiliates” in Item 1 of this Annual Report on Form 10-K.

We may elect or be compelled to seek additional capital in the future, but that capital may not be available

when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our

operations. Federal banking agencies have proposed extensive changes to their capital requirements; including
raising required amounts and eliminating the inclusion of certain instruments from the calculation of capital. The
final form of such regulations and their impact on the Company is unknown at this time, but may require us to raise
additional capital. In addition, we may elect to raise capital to support our business or to finance acquisitions, if any,
or for other anticipated reasons. Our ability to raise additional capital, if needed, will depend on financial
performance, conditions in the capital markets, economic conditions and a number of other factors, including the
satisfaction or release of preemptive rights in the event of a common share offering, many of which are outside our
control. Therefore, there can be no assurance additional capital can be raised when needed or that capital can be
raised on acceptable terms. Impairment to our ability to raise capital may have a material adverse effect on our
business, financial condition or results of operations.

Risks Related to the Legal and Regulatory Environment

Increases in FDIC insurance premiums may have a material adverse effect on our earnings.

The FDIC maintains the Deposit Insurance Fund to resolve the cost of bank failures. Since late 2008, the FDIC

has taken various actions intended to maintain a strong funding position and restore reserve ratios of the Deposit
Insurance Fund. Those actions included increasing assessment rates for all insured institutions, requiring riskier
institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and
unsecured debt levels, and imposing special assessments. In addition, in 2011 the FDIC approved a final rule that
changed the deposit insurance assessment base and assessment rate schedule, adopted a new large-bank pricing
assessment scheme and set a target size for the Deposit Insurance Fund. The rule, as mandated by the Dodd-Frank
Act, finalized a target size for the Deposit Insurance Fund at 2 percent of insured deposits. The FDIC recently
adopted rules revising assessments in a manner that benefits banks with assets of less than $10 billion, although
there can be no assurance that such assessments will not change in the future.

We have a limited ability to control the amount of premiums we are required to pay for FDIC insurance. If

there are additional financial institution failures or other significant legislative or regulatory changes, the FDIC may
be required to increase assessment rates or take actions similar to those taken after 2008. Increases in FDIC
insurance assessment rates may materially adversely affect our results of operations and our ability to continue to
pay dividends on our common shares at the current rate or at all.

Legislative or regulatory changes or actions, or significant litigation, could adversely impact us or the

businesses in which we are engaged.

The financial services industry is extensively regulated. We are subject to extensive state and federal
regulation, supervision and legislation that govern almost all aspects of our operations. Laws and regulations may
change from time to time and are primarily intended for the protection of consumers, depositors and the Deposit
Insurance Fund, and not to benefit our shareholders. The impact of any changes to laws and regulations or other
actions by regulatory agencies may negatively impact us or our ability to increase the value of our business.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including the imposition of restrictions on the operation of an institution, the classification of assets by an institution
and the adequacy of an institution’s allowance for loan losses. Additionally, actions by regulatory agencies or
significant litigation against us could cause us to devote significant time and resources to defending our business and
may lead to penalties that materially affect our shareholders and us.

In addition to laws, regulations and actions directed at the operations of banks, proposals to reform the
housing finance market consider winding down Fannie Mae and Freddie Mac, which could negatively affect our
sales of loans.

Even a reduction in regulatory restrictions could adversely affect our operations and our shareholders if less

restrictive regulation increases competition within the industry generally or within our markets.

Our results of operations, financial condition or liquidity may be adversely impacted by issues arising in

foreclosure practices, including delays in the foreclosure process, related to certain industry deficiencies, as well
as potential losses in connection with actual or projected repurchases and indemnification payments related to
mortgages sold into the secondary market.

Previous announcements of deficiencies in foreclosure documentation by several large seller/servicer financial
institutions have raised various concerns relating to mortgage foreclosure practices. The integrity of the foreclosure
process is important to our business, as an originator and servicer of residential mortgages. As a result of our
continued focus of concentrating our lending efforts in our primary markets in Ohio, as well as servicing loans for
the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac), we do not anticipate suspending any of our foreclosure activities. We previously reviewed our
foreclosure procedures and concluded they are generally conservative in nature and do not present the significant
documentation deficiencies underlying other industry foreclosure problems. Nevertheless, we could face delays and
challenges in the foreclosure process arising from claims relating to industry practices generally, which could
adversely affect recoveries and our financial results, whether through increased expenses of litigation and property
maintenance, deteriorating values of underlying mortgaged properties or unsuccessful litigation results generally.

In addition, in connection with the origination and sale of residential mortgages into the secondary market, we
make certain representations and warranties, which, if breached, may require us to repurchase such loans, substitute
other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. Although
we believe that our mortgage documentation and procedures have been appropriate and are generally conservative in
nature, it is possible that we will receive repurchase requests in the future and we may not be able to reach favorable
settlements with respect to such requests. It is therefore possible that we may increase our reserves or may sustain
losses associated with such loan repurchases and indemnification payments.

Environmental liability associated with commercial lending could have a material adverse effect on our

business, financial condition or results of operations.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of business,
we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or
toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable
for remediation costs, as well as for personal injury and property damage. In addition, we own and operate certain
properties that may be subject to similar environmental liability risks.

Environmental laws may require us to incur substantial expenses and may materially reduce the affected

property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent
interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental
liability. Although we have policies and procedures requiring the performance of an environmental site assessment
before initiating any foreclosure action on real property, these assessments may not be sufficient to detect all
potential environmental hazards. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our business, financial condition or results of
operations.

Impairment of investment securities, goodwill, other intangible assets, or deferred tax assets could require

charges to earnings, which could result in a negative impact on our results of operations.

In assessing the impairment of investment securities, we consider the length of time and extent to which the fair
value has been less than cost, the financial condition and near-term prospects of the issuers, whether the market decline
was affected by macroeconomic conditions and whether we have the intent to sell the debt security or will be required
to sell the debt security before its anticipated recovery. Under current accounting standards, goodwill and certain other
intangible assets with indeterminate lives are no longer amortized but, instead, are assessed for impairment periodically
or when impairment indicators are present. Assessment of goodwill and such other intangible assets could result in
circumstances where the applicable intangible asset is deemed to be impaired for accounting purposes. Under such
circumstances, the intangible asset’s impairment would be reflected as a charge to earnings in the period. Deferred tax
assets are only recognized to the extent it is more likely than not they will be realized. Should management determine
it is not more likely than not that the deferred tax assets will be realized, a valuation allowance with a change to
earnings would be reflected in the period. This was realized as a result of the enactment on December 22, 2017, of
H.R.1, known as the “Tax Cuts and Jobs Act” which, among other things, reduced the corporate income tax rate to
21% effective January 1, 2018. As a result of passage of the new tax law, Farmers completed a revaluation of its net
deferred tax assets. The Company’s deferred tax assets, net of deferred tax liabilities, represent corporate tax
benefits anticipated to be realized in the future. The reduction in the federal corporate tax rate, effective January 1,
2018, reduces these benefits. Farmers reduced its net deferred tax assets by approximately $1.8 million in the fourth
quarter of 2017, representing an impact on earnings per share of approximately $0.06 per diluted share based fourth
quarter weighted average diluted shares outstanding of approximately 27.5 million.

Changes and uncertainty in tax laws, including the recently enacted Tax Cuts and Jobs Act, could

adversely affect our performance.

We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll,
financial institutions tax, withholding and ad valorem taxes. Changes to our taxes could have a material adverse
effect on our results of operations and, as described in the above risk discussion and below, the fair value of net
deferred tax assets. In addition, our customers are subject to a wide variety of federal, state and local taxes.
Changes in taxes paid by our customers may adversely affect their ability to purchase homes or consumer products,
which could adversely affect their demand for our loans and deposit products. In addition, such negative effects on
our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed
securities in which we have invested.

The Tax Cuts and Jobs Act, among other changes, imposes additional limitations on the federal income tax
deductions individual taxpayers may take for mortgage loan interest payments and for payments of state and local
taxes, including real property taxes. The Tax Cuts and Jobs Act also imposes additional limitations on the
deductibility of business interest expense and eliminates other deductions in their entirety, including deductions for
certain home equity loan interest payments. Such limits and eliminations may result in customer defaults on loans
we have made and decrease the value of mortgage-backed securities in which we have invested.

Anti-takeover provisions could delay or prevent an acquisition or change in control by a third party.

Provisions of the Ohio General Corporation Law, our Amended Articles of Incorporation, and our Amended

Code of Regulations, including a staggered board and supermajority voting requirements, could make it more
difficult for a third party to acquire control of us or could have the effect of discouraging a third party from
attempting to acquire control of us.

We may be a defendant from time to time in the future in a variety of litigation and other actions, which

could have a material adverse effect on our business, financial condition or results of operations.

Our subsidiaries and we may be involved from time to time in the future in a variety of litigation arising out of

our business. Our insurance may not cover all claims that may be asserted against us, and any claims asserted
against us, regardless of merit or eventual outcome, may harm our reputation. Should the ultimate judgments or
settlements in any litigation exceed our insurance coverage, they could have a material adverse effect on our
business, financial condition or results of operations. In addition, we may not be able to obtain appropriate types or
levels of insurance in the future, nor may we be able to obtain adequate replacement policies with acceptable terms,
if at all.

Item 1B. Unresolved Staff Comments.

There are no matters of unresolved staff comments from the Commission staff.

Item 2. Properties.

Farmers National Banc Corp.’s Properties

The Company does not own any property. The Company’s operations are conducted at Farmers Bank’s main

office, which is located at 20 and 30 S. Broad St., Canfield, Ohio.

Farmers National Bank Property

The Bank’s main office is located at 20 and 30 S. Broad St., Canfield, Ohio. The other locations of Farmers

Bank are:

Office Building..................... 40 & 46 S. Broad St., Canfield, Ohio
Austintown Office ................ 22 N. Niles-Canfield Rd., Youngstown, Ohio
Lake Milton Office ............... 17817 Mahoning Avenue, Lake Milton, Ohio
Cornersburg Office............... 3619 S. Meridian Rd., Youngstown, Ohio
Colonial Plaza Office ........... 401 E. Main St., Canfield, Ohio
Western Reserve Office........ 102 W. Western Reserve Rd., Youngstown, Ohio
Salem Office......................... 2424 E. State St., Salem, Ohio
Columbiana Office ............... 340 State Rt. 14, Columbiana, Ohio
Damascus Office .................. 29053 State Rt. 62, Damascus, Ohio
Poland Office........................ 106 McKinley Way W., Poland, Ohio
Niles Office .......................... 1 S. Main St., Niles, Ohio
Niles Drive Up...................... 170 E. State St., Niles, Ohio
Girard Office ........................ 121 N. State St., Girard, Ohio
Eastwood Office ................... 5845 Youngstown-Warren Rd., Niles, Ohio
Niles Operation Center ......... 51 S. Main St., Niles, Ohio
Canton Office ....................... 4518 Fulton Dr. NW, Suite 100, Canton, Ohio
McClurg Road Office ........... 42 McClurg Rd., Boardman, Ohio
Howland Office .................... 1625 Niles-Cortland Rd., Warren, Ohio
Fairlawn Office..................... 2820 W. Market St., Suite 120, Akron, Ohio
Wealth Management Bldg..... 2 S. Broad St., Canfield, Ohio
Alliance Office ..................... 310 W. State St., Alliance, Ohio
Midway Office ..................... 7227 E. Lincoln Way, Apple Creek, Ohio
Dalton Office........................ 12 W. Main St., Dalton, Ohio
Calcutta Office ..................... 15703 State Rt. 170, Calcutta, Ohio
East Liverpool Office ........... 617 Bradshaw Ave., East Liverpool, Ohio
Kidron Office ....................... 4950 Kidron Rd., Kidron, Ohio
Lisbon Office........................ 131 E. Lincoln Way, Lisbon, Ohio
Lodi Office ........................... 106 Ainsworth St., Lodi, Ohio
Massillon Office ................... 211 Lincoln Way E., Massillon, Ohio
Mayflower Office ................. 2312 Lincoln Way NW, Massillon, Ohio
Mount Eaton Office.............. 15974 E. Main St., Mount Eaton, Ohio
Orrville Main Office............. 112 W. Market St., Orrville, Ohio
West High Street Office ....... 1320 W. High St., Orrville, Ohio
Seville Office........................ 4885 Atlantic Dr., Seville, Ohio
Smithville Office .................. 153 E. Main St., Smithville, Ohio
Burbank Road Office............ 4192 Burbank Rd., Wooster, Ohio
Downtown Wooster Office... 305 W. Liberty St., Wooster, Ohio
Midland Office ..................... 629 Midland Ave., Midland, Pennsylvania
Beachwood Lending Office.... 27600 Chagrin Blvd., Suite 300, Woodmere, Ohio
Big Prairie Office ................. 13210 State Route 226, Big Prairie, Ohio
Beaver Lending Office ......... 501 3rd St., Beaver, Pennsylvania

The Bank owns all locations except the Colonial Plaza, Canton, Alliance, East Liverpool, Fairlawn, and

Downtown Wooster offices, and the Beaver and Beachwood lending offices, which are leased.

Farmers Trust Company Property

Farmers Trust operates from four locations owned and leased by the Bank:

Boardman Office ...................... 42 McClurg Rd., Boardman, Ohio
Howland Office ........................ 1625 Niles-Cortland Rd., Warren, Ohio
Canton Office ........................... 4518 Fulton Dr. NW, Suite 100, Canton, Ohio
Downtown Wooster Office....... 305 W. Liberty St., Wooster, Ohio

The Bank owns the Boardman and Howland offices and leases space to Farmers Trust. The Canton and

Wooster locations are leased from third parties.

Farmers National Insurance, LLC Property

Farmers Insurance operates from two locations, which are owned by the Bank:

Wealth Management
Building .............................. 2 S. Broad St., Canfield, Ohio
Bowers Group Building............ 339 N. High St., Cortland, Ohio

National Associates, Inc. Property

NAI operates from one location, which is leased:

Fairview Park............................ 22720 Fairview Center Dr., Suite 100, Fairview

Park, Ohio

Item 3. Legal Proceedings.

In the normal course of business, the Company and its subsidiaries are at times subject to pending and
threatened legal actions, some for which the relief or damages sought are substantial. Although Farmers is not able
to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management
believes that, based on the information currently available, the outcome of such actions, individually or in the
aggregate, would not have a material adverse effect on the results of operations or stockholders’ equity of the
Company. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to
the results of operations in a particular future period as the time and amount of any resolution of such actions and its
relationship to the future results of operations are not known.

Item 4. Mine Safety Disclosures

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases of
Equity Securities

Market Information regarding the Company’s Common Shares.

Farmers’ common shares currently trade under the symbol “FMNB” on the Nasdaq Capital Market. Farmers
had 27,790,601 common shares outstanding and approximately 3,357 holders of record of common shares at March
1, 2019. The following table sets forth price ranges and dividend information for Farmers’ common shares for the
calendar quarters indicated. Quotations reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent actual transactions. Certain limitations and restrictions on the ability of Farmers
to continue to pay quarterly dividends are described under the caption “Capital Resources” in Item 7 of this Part II,
and under the caption “Dividends and Transactions with Affiliates” in Item 1 of Part I.

Quarter Ended
High........................................................................ $
Low......................................................................... $
Cash dividends paid per share ................................ $

March 31,
2018

June 30,
2018

September 30,
2018

December 31,
2018

15.90 $
12.80 $
0.07 $

16.75 $
13.56 $
0.07 $

16.90 $
14.95 $
0.08 $

15.48
11.56
0.08

March 31,
2017

June 30,
2017

September 30,
2017

December 31,
2017

14.90 $
12.13 $
0.05 $

15.25 $
12.65 $
0.05 $

15.65 $
12.90 $
0.06 $

15.95
13.35
0.06

Purchases of Common Shares by Farmers.

In September 2012, the Company announced that its Board of Directors approved a share repurchase program

under which the Company was authorized to repurchase up to 920,000 shares of its common stock in the open
market or in privately negotiated transactions, subject to market and other conditions (the “Program”). The Program
may be modified, suspended or terminated by the Company at any time. There were no shares repurchased during
the course of 2018 and 2017. 19,900 shares of its common stock were repurchased by the Company in 2016.

Item 6. Selected Financial Data.

SELECTED FINANCIAL DATA
(Table Dollar Amounts in Thousands except Per Share Data)

For the Years Ending December 31,
Summary of Earnings

Total Interest and Dividend Income
(including fees on loans) ......................... $
Total Interest Expense ................................
Net Interest Income ....................................
Provision for Loan Losses ..........................
Noninterest Income ....................................
Noninterest Expense...................................
Income Before Income Taxes.....................
Income Taxes .............................................
NET INCOME ........................................... $

Per Share Data

Basic Earnings Per Share ........................... $
Diluted Earnings Per Share ........................
Cash Dividends Paid ..................................
Book Value at Year-End ............................
Tangible Book Value (1) ............................

Balances at Year-End

2018

2017

2016

2015

2014

91,766
13,265
78,501
3,000
25,499
62,717
38,283
5,714
32,569

1.18
1.16
0.30
9.44
7.86

80,527
6,881
73,646
3,350
24,051
61,567
32,780
10,069
22,711

0.82
0.82
0.22
8.79
7.14

72,498
4,378
68,120
3,870
23,244
59,452
28,042
7,485
20,557

0.76
0.76
0.16
7.88
6.21

53,827
4,090
49,737
3,510
18,306
53,979
10,554
2,499
8,055

0.36
0.36
0.12
7.35
5.76

40,915
4,579
36,336
1,880
15,303
38,162
11,597
2,632
8,965

0.48
0.48
0.12
6.71
6.23

Total Assets ................................................ $2,328,864
Earning Assets ............................................ 2,076,969
Total Deposits............................................. 1,799,720
244,759
Short-Term Borrowings .............................
6,033
Long-Term Borrowings..............................
Loans Held for Sale ....................................
1,237
Net Loans ................................................... 1,722,248
262,320
Total Stockholders' Equity .........................

$2,159,069
1,998,245
1,604,719
289,565
6,994
272
1,565,066
242,074

$1,966,113
1,819,455
1,524,756
198,460
15,036
355
1,416,783
213,216

$1,869,902
1,735,843
1,409,047
225,832
22,153
1,769
1,287,887
198,047

$1,136,967
1,074,434
915,703
59,136
28,381
511
656,220
123,560

Average Balances

Total Assets ................................................ $2,230,380
247,965
Total Stockholders' Equity .........................

$2,082,447
228,963

$1,924,914
211,408

$1,482,527
162,086

$1,141,047
120,352

Significant Ratios

Return on Average Assets (ROA) ..............
Return on Average Equity (ROE) ..............
Average Earning Assets/Average Assets ...
Average Equity/Average Assets.................
Loans/Deposits ...........................................
Allowance for Loan Losses/Total Loans....
Allowance for Loan
Losses/Nonperforming Loans .................
Efficiency Ratio (Tax equivalent basis)(2) ....
Net Interest Margin ....................................
Dividend Payout Rate.................................
Tangible Common Equity Ratio (3) ...........

1.46%
13.13
93.01
11.12
96.20
0.78

1.09%
9.92
92.35
10.99
98.30
0.78

1.07%
9.72
91.49
10.98
93.63
0.76

175.81
57.93
3.87
25.53
9.56

160.04
59.66
3.99
26.47
9.31

132.83
61.59
4.01
21.03
8.75

0.54%
4.97
91.91
10.93
92.04
0.69

85.96
75.26
3.81
33.32
8.50

0.79%
7.45
93.02
10.55
72.50
1.15

89.99
70.24
3.59
24.95
10.17

(1)

Tangible book value per share is Total Stockholders’ Equity minus goodwill and other intangible assets
divided by the number of shares outstanding.

(2)

(3)

The efficiency ratio is calculated by dividing total noninterest expense by net interest income plus noninterest
income.

The tangible common equity ratio is calculated by dividing total common stockholders’ equity by total assets,
after reducing both amounts by intangible assets. The tangible common equity ratio is not required by U.S.
GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the
adequacy of our capital levels. Since there is no authoritative requirement to calculate the tangible common
equity ratio, our tangible common equity ratio is not necessarily comparable to similar capital measures disclosed
or used by other companies in the financial services industry. Tangible common equity and tangible assets are
non U.S. GAAP financial measures and should be considered in addition to, not as a substitute for or superior to,
financial measures determined in accordance with U.S. GAAP. With respect to the calculation of the actual
unaudited tangible common equity ratio as of December 31, 2018, reconciliations of tangible common equity to
U.S. GAAP total common stockholders’ equity and tangible assets to U.S. GAAP total assets are set forth below:

Reconciliation of Common Stockholders’ Equity to Tangible Common Equity

December 31,
2014
Stockholders' Equity ................................................. $ 262,320 $ 242,074 $ 213,216 $ 198,047 $ 123,560
Less Goodwill and other intangibles.........................
8,813
Tangible Common Equity ......................................... $ 218,368 $ 196,705 $ 168,062 $ 155,136 $ 114,747

45,154

45,369

42,911

43,952

2015

2017

2016

2018

Reconciliation of Total Assets to Tangible Assets

December 31,
2014
Total Assets .............................................................. $2,328,864 $2,159,069 $1,966,113 $1,869,902 $1,136,967
8,813
Less Goodwill and other intangibles ........................
Tangible Assets ........................................................ $2,284,912 $2,113,700 $1,920,959 $1,826,991 $1,128,154

45,154

42,911

45,369

43,952

2016

2015

2018

2017

Acquisitions have occurred during the five year periods represented above that makes comparability difficult. The
current year impact of enacted federal tax reform makes comparability difficult too. See Note 2 – Business
Combinations and Note 17 – Income Taxes for additional details.

Reconciliation of Net Income, Excluding Merger Related Expenses and Deferred Tax Asset Adjustment

2018

December 31,
Net income ................................................................ $ 32,569 $ 22,711 $ 20,557 $
412
Acquisition related costs - tax equated .....................
0
Deferred tax asset adjustment ...................................
20,969
Net income - adjusted ...............................................
Average basic shares outstanding .............................
27,000
EPS excluding acquisition costs and deferred tax
asset adjustment ........................................................ $

283
1,793
24,787
27,568

(158)
0
32,411
27,675

0.90 $

0.78 $

1.17 $

2017

2016

2015
8,055 $
4,831
0
12,886
22,678

2014
8,965
0
0
8,965
18,675

0.57 $

0.48

Reconciliation of Return on Average Assets and Average Equity, Excluding Merger Related Expenses and Deferred
Tax Asset Adjustment

December 31,
ROA excluding merger related expenses (4)............
ROE excluding merger related expenses (5) ............

2018
1.45%
13.07%

2017
1.19%
10.83%

2016
1.09%
9.92%

2015
0.87%
7.95%

2014
0.79%
7.45%

(4) Net income - adjusted divided by average assets

(5) Net income - adjusted divided by average equity

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RATE AND VOLUME ANALYSIS
(Table Dollar Amounts in Thousands except Per Share Data)

The following table analyzes by rate and volume the dollar amount of changes in the components of the interest
differential:

Tax Equivalent Interest Income

Loans .................................................................... $
Taxable securities .................................................
Tax-exempt securities...........................................
Equity securities ...................................................
Funds sold and other cash.....................................
Total interest income ................................................... $

Interest Expense

Time deposits........................................................ $
Brokered time deposits .........................................
Savings deposits ...................................................
Demand deposits ..................................................
Short term borrowings ..........................................
Long term borrowings ..........................................
Total interest expense.................................................. $

Increase (decrease) in tax equivalent
net interest income.................................................... $

2018 change from 2017

2017 change from 2016

Net
Change

Change Due Change Due
To Volume

To Rate

Net
Change

Change Due Change Due
To Volume

To Rate

9,619 $
29
(98)
115
250
9,915 $

1,645 $
2
287
1,715
2,769
(34)
6,384 $

6,568 $
(4,434)
1,151
57
(40)
3,302 $

3,051 $
4,463
(1,249)
58
290
6,613 $

540 $
2
(78)
299
81
(75)
769 $

1,105 $
0
365
1,416
2,688
41
5,615 $

6,816 $
(159)
1,712
22
228
8,619 $

730 $
0
43
496
1,478
(244)
2,503 $

7,078 $
(557)
1,485
36
16
8,058 $

(20) $
0
(25)
150
193
(239)
59 $

(262)
398
227
(14)
212
561

750
0
68
346
1,285
(5)
2,444

3,531 $

2,533 $

998 $

6,116 $

7,999 $

(1,883)

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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following presents a discussion and analysis of Farmers’ financial condition and results of operations by

its management. The review highlights the principal factors affecting earnings and the significant changes in balance
sheet items for the years 2018, 2017 and 2016. Financial information for prior years is presented when appropriate.
The objective of this financial review is to enhance the reader’s understanding of the accompanying tables and
charts, the consolidated financial statements, notes to financial statements and financial statistics appearing
elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s
insights of known events and trends that have or may reasonably be expected to have a material effect on Farmers’
business, financial condition or results of operations.

Cautionary Note Regarding Forward Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the safe

harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements
are not statements of historical fact, but rather statements based on Farmers’ current expectations, beliefs and
assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events
and trends, its intended results and future performance, the economy and other future conditions. Forward-looking
statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,”
“believe,” “anticipate,” “intend,” “plan” “project,” or variations of these words, or similar expressions. Forward-
looking statements are not a guarantee of future performance, and actual future results could differ materially from
those contained in forward-looking information. Because forward-looking statements relate to the future, they are
subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which
are outside of our control. Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual
results, performance, and achievements to be materially different from those expressed or implied by the forward-
looking statements. Factors that could cause or contribute to such differences include, without limitation, risks and
uncertainties detailed from time to time in Farmers’ filings with the Securities and Exchange Commission, including
without limitation the risk factors disclosed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K.

Readers are cautioned not to put undue reliance on forward-looking statements, which speak only as of the

date thereof. The following list, which is not intended to be an all-encompassing list of risks and uncertainties
affecting the Company, summarizes several factors that could cause the Company’s actual results to differ
materially from those anticipated or expected in these forward-looking statements:

•

general economic conditions in market areas where Farmers conducts business, which could
materially impact credit quality trends;

business conditions in the banking industry;

the regulatory environment;

fluctuations in interest rates;

demand for loans in the market areas where Farmers conducts business;

rapidly changing technology and evolving banking industry standards;

competitive factors, including increased competition with regional and national financial
institutions;

new service and product offerings by competitors and price pressures; and

other similar items.

Other factors not currently anticipated may also materially and adversely affect Farmers’ business, financial

condition, results of operations or cash flows. There can be no assurance that future results will meet expectations.
Farmers does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a
result of new information, future events or otherwise, except as may be required by applicable law.

Results of Operations

Comparison of Operating Results for the Years Ended December 31, 2018 and 2017.

The Company’s net income totaled $32.6 million during 2018, compared to $22.7 million for 2017. On a per
share basis, diluted earnings per share were $1.16 as compared to $0.82 diluted earnings per share for 2017. Return
on average assets and return on average equity were 1.46% and 13.13%, respectively, for the year ending December
31, 2018, compared to 1.09% and 9.92% for 2017. The return on average tangible equity increased from 13.48% in
2017 to 15.95% in 2018.

On December 22, 2017, H.R.1, known as the “Tax Cuts and Jobs Act,” was signed into law. H.R.1, among
other things, reduced the corporate income tax rate to 21% effective January 1, 2018. As a result of passage of the
new tax law, Farmers’ effective tax rate decreased from 30.72% for the year ended December 31, 2017 to 14.92%
for the year ended December 31, 2018. It is important to note that also as a result of the new tax law, Farmers
determined that its net deferred tax assets needed to be reduced in the fourth quarter of 2017 by approximately $1.8
million, representing an impact on earnings per share of approximately $0.06 per diluted share for that fourth quarter,
based on that quarter’s weighted average diluted shares outstanding of approximately 28 million.

On August 15, 2017, the Company completed the acquisition of Monitor, the holding company for Monitor
Bank. The transaction involved both cash and 465,787 shares of stock totaling $7.5 million. Pursuant to the terms
of the merger agreement, common shareholders of Monitor were entitled to elect to receive consideration in cash or
in common shares, without par value, of the Farmers National Banc Corp., subject to an overall limitation of 85% of
the Monitor common shares being exchanged for Farmers common shares and 15% exchanged for cash. The per
share cash consideration of $769.38 is equal to Monitor’s March 31 tangible book value multiplied by 1.25. Based
on the volume weighted average closing price of Farmers common shares for the 20 trading days ended August 11,
2017 of $14.04, the final stock exchange ratio was 54.80, resulting in an implied value per Monitor common share
of $769.38.

Net Interest Income

Net interest income, the principal source of the Company’s earnings, represents the difference between

interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 2018, taxable
equivalent net interest income increased $3.5 million, or 4.6%, from 2017. Interest-earning assets averaged $2.075
billion during 2018, increasing $151.3 million compared to 2017. The Company’s interest-bearing liabilities
increased 7.1% from $1.449 billion in 2017 to $1.553 billion in 2018.

The Company 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 Company 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 spread in 2018 was 3.66%, decreasing from 3.88% in 2017. 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 2018, the net interest margin, measured on a fully taxable equivalent basis, decreased to
3.87%, compared to 3.99% in 2017. The net interest margin, excluding the impact of amortization and accretion
from acquisitions, decreased 13 basis point to 3.83% for the year ended December 31, 2018. The accretion added
$69.5 thousand per month during 2018 and will continue over the next several years.

The decrease in net interest margin is mainly due to pressure on increasing deposit rates as the Federal
Reserve Bank continued to raise the federal funds interest rate in 2018. The federal funds interest rate increased 4
times for a total of 100 basis points during the year. Total taxable equivalent interest income was $93.6 million for
2018, which is $9.9 million more than the $83.7 million reported in 2017. In comparing the years ending December
31, 2018 and 2017, yields on earning assets increased 16 basis points while the cost of interest bearing liabilities
increased 38 basis points. Average loans increased $139.0 million, or 9.3%, in 2018, and the loan yield increased
eighteen basis points to 4.91%. Tax equated income from securities, federal funds and other increased $296
thousand, or 2.3%, in 2018. Farmers saw its yields on these assets decrease slightly from 3.05% in 2017 to 3.04% in
2018 and the average balance of investment securities and federal funds sold also increased from $429.6 million in
2017 to $442.0 million in 2018.

The increase in the federal funds interest rate as mentioned above impacted the cost of short-term borrowings and

interest-bearing deposits during 2018. Total interest expense amounted to $13.3 million for 2018, a 92.8% increase
from $6.9 million reported in 2017. Interest-bearing deposits increased $96.4 million or 8.2% and increases in interest
rates paid on deposits resulted in a $3.6 million or 81.3% increase in interest expense on deposit balances. Other
borrowings balances increased only $6.9 million or 2.5%, however the interest expense related to these borrowings
increased $2.7 million or 114%. The total cost of interest-bearing deposits and borrowings increased from 0.47% in
2017 to 0.85% in 2018.

Management will continue to evaluate future changes in interest rates and the shape of the treasury yield curve

so that assets and liabilities may be priced accordingly to minimize the impact on the net interest margin.

Noninterest Income

Total noninterest income increased by $1.4 million or 6% in 2018. The increase in noninterest income is due

to several factors. Trust fee income increased from $6.4 million to $7.1 million, representing an increase of $695
thousand or 10.8%, resulting from growth in new customers and an increase in market value of trust assets.
Commissions from the sale of investment products increased $184 thousand or 20% during 2018. Debit card
interchange fees increased $262 thousand or 8.5% as customers continue to increase their use of debit cards to make
purchases of goods and services. Insurance agency commissions also increased to $2.6 million compared to $2.4
million in 2017 and service charges on deposit accounts increased from $4.1 million in 2017 to $4.3 million in 2018.
These increases were offset by a decrease in income from the sale of mortgage loans of $337 thousand and a
decrease in retirement plan consulting fees of $173 thousand. The Bank and the Company expect noninterest
income to increase during 2019 as management continues to focus on growing the various sources of noninterest
income.

Noninterest Expenses

Noninterest expense for 2018 was $62.7 million, compared to $61.6 million in 2017, representing an increase
of $1.1 million, or 1.8%. Most of the increase was from salaries and employee benefits, which grew $1.2 million or
3.5%, mainly due to merit increases in salaries and a 1.8% increase the number of full time equivalent employees
from 445 to 453. Other operating expenses increased by $309 thousand or 4.2%, and state and local taxes increased
by $224 thousand or 13.5%. These increases were offset by a drop in merger related expenses of $1 million.
Excluding expenses related to acquisition activities, noninterest expenses measured as a percentage of average assets
decreased from 2.93% in 2017 to 2.82% in 2018.

The Company’s tax equivalent efficiency ratio for the twelve-month period ended December 31, 2018 was

57.93%, compared to 59.66% for the same period in 2017. The main factors leading to the improvement in the
efficiency ratio was the increase in net interest income and noninterest income, along with the stabilized level of
noninterest expenses relative to average assets as explained in the preceding paragraph. The efficiency ratio is
calculated as follows: non-interest expense divided by the sum of tax equivalent net interest income plus non-
interest income, excluding security gains and losses and intangible amortization. This ratio is a measure of the
expense incurred to generate a dollar of revenue. Management will continue to closely monitor and keep the
increases in other expenses to a minimum.

Income Taxes

Income tax expense totaled $5.7 million for 2018 and $10.1 million in 2017. Income taxes are computed

using the appropriate effective tax rates for each period. The decrease in the current year tax expense is primarily
attributable to the previously mentioned reduction in the corporate income tax rate from 35% to 21% as a result of
the Tax Cuts and Jobs Act. The income tax expense of $10.1 million in 2017 was also impacted by the $1.8 million
adjustment increase to income tax expense as a result of the write-down of the Company’s deferred tax asset from
35% to 21%. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and
dividend income. The effective income tax rate was 14.9% for 2018 and 30.7% for 2017. We anticipate that the
effective rate in 2019 will be in the range of 15% to 16%. Refer to Note 16 to the consolidated financial statements
for additional information regarding the effective tax rate.

Comparison of Operating Results for the Years Ended December 31, 2017 and 2016.

The Company’s net income totaled $22.7 million during 2017, compared to $20.6 million for 2016. On a per

share basis, diluted earnings per share were $0.82 as compared to $0.76 diluted earnings per share for 2016.
Excluding a $1.8 million adjustment of the net deferred tax asset resulting from the Tax Cut and Jobs Act that
became law in December 2017 and $524 thousand in expenses related to acquisition activities, net income for 2017
would have been $24.8 million, or $0.90 per share. Common comparative ratios for results of operations include the
return on average assets and return on average stockholders’ equity. For 2017, the return on average equity was
9.92%, compared to 9.72% for 2016. The return on average assets was 1.09% for 2017 and 1.07% for 2016.
Excluding expenses related to acquisition activities, the return on average assets and return on average stockholders’
equity for 2017 would have been 1.19% and 10.83% in 2017, while the return on average tangible equity would
have been 13.48%.

Net Interest Income

For 2017, taxable equivalent net interest income increased $6.1 million, or 8.7%, from 2016. Interest-earning

assets averaged $1.9 billion during 2017, increasing $162 million compared to 2016. The Company’s interest-
bearing liabilities increased 7.3% from $1.35 billion in 2016 to $1.45 billion in 2017. The previously mentioned
acquisition of Monitor increased interest-earning assets by $38.1 million and interest-bearing liabilities by $17.8
million at the completion date.

Total taxable equivalent interest income was $83.7 million for 2017, which is $8.6 million more than the
$75.1 million reported in 2016. In comparing the years ending December 31, 2017 and 2016, yields on earning
assets increased 9 basis points while the cost of interest bearing liabilities increased 15 basis points. Average loans
increased $149.2 million, or 11.1%, in 2017, and the loan yield decreased one basis point to 4.73%. Tax equated
income from securities, federal funds and other increased $1.8 million, or 15.9%, in 2017. Farmers saw its yields on
these assets increase slightly from 2.72% in 2016 to 3.05% in 2017. The average balance of investment securities
and federal funds sold also increased from $416.8 million in 2016 to $429.6 million in 2017.

Total interest expense amounted to $6.9 million for 2017, a 57.2% increase from $4.4 million reported in
2016. The increase in 2017 is the result of a $49.1 million or 4.4% increase in interest-bearing deposits and a $49.1
million or 21.2% increase in other borrowings. The cost of interest-bearing liabilities increased from 0.32% in 2016
to 0.47% in 2017.

Noninterest Income

Total noninterest income increased by $807 thousand or 3.5% in 2017. The increase in noninterest income is
due to several factors. Gains on the sale of mortgage loans increased from $2.8 million to $3.1 million, representing
an increase of $300 thousand or 8%. Insurance agency commissions also increased to $2.4 million compared to $1.6
million in 2016 and service charges on deposit accounts increased from $4.0 million in 2016 to $4.1 million in 2017,
reflecting the size of the company after previous bank acquisitions. Debit card interchange fees also increased $430
thousand or 16.1%. These increases were offset by a decrease in other operating income of $478 thousand and a
decrease in investment commissions of $291 thousand.

Noninterest Expenses

Noninterest expense for 2017 was $61.6 million, compared to $59.5 million in 2016, representing an increase

of $2.1 million, or 3.6%. Most of the increase was from salaries and employee benefits, which increased $2.9
million or 8.9%, mainly due to an increase in salaries, as the acquisition of Bowers Insurance Agency, Inc. (Bowers)
was completed on June 1, 2016 which resulted in seven months of expense in 2016 compared to a full year in 2017.
The Company also experienced an increase in employee health care insurance expense in 2017. The Company’s full
time equivalent employees (“FTE”) increased by 1.0% from December 31, 2016 to December 31, 2017. Other
operating expenses decreased by $1.0 million as a result of increased efficiencies gained as the Company grew in
2017. Excluding expenses related to acquisition activities, noninterest expenses measured as a percentage of
average assets decreased from 3.06% in 2016 to 2.93% in 2017.

The Company’s tax equivalent efficiency ratio for the 12 month period ended December 31, 2017 was
59.66%, compared to 61.59% for the same period in 2016. Excluding expenses related to acquisition activities, the
efficiency ratio for the year ended December 31, 2017 improved to 58.79% compared to 60.99% in 2016. The main
factors leading to the improvement in the efficiency ratio was the increase in net interest income and noninterest
income, along with the stabilized level of noninterest expenses relative to average assets as explained in the
preceding paragraph. The efficiency ratio is calculated as follows: non-interest expense divided by the sum of tax
equivalent net interest income plus non-interest income, excluding security gains and losses and intangible
amortization. This ratio is a measure of the expense incurred to generate a dollar of revenue. Management will
continue to closely monitor and keep the increases in other expenses to a minimum.

Income Taxes

Income tax expense totaled $10.1 million for 2017 and $7.5 million in 2016. The increase in the current year
tax expense can be mainly attributed to the 16.9% increase in income before taxes. The previously mentioned Tax
Cuts and Jobs Act also added $1.8 million to 2017’s income tax expense as a result of the write-down of the
Company’s deferred tax asset from 35% to 21%. The effective tax rates are less than the statutory tax rate primarily
due to nontaxable interest and dividend income. The effective income tax rate was 30.7% for 2017 and 26.7% for
2016.

Liquidity

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

Principal sources of liquidity 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, Farmers 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 two major domestic banks. At December 31, 2018, Farmers 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 Company also has additional borrowing capacity with the FHLB, as well as
access to the Federal Reserve Discount Window, which provides an additional source of funds. The Company
views its membership in the FHLB as a solid source of liquidity. As of December 31, 2018, the Bank is eligible to
borrow an additional $309 million from the FHLB under various fixed rate and variable rate credit facilities.
Advances outstanding from the FHLB at December 31, 2018 amounted to $243.8 million.

Farmers’ primary investing activities are originating loans and purchasing securities. During 2018, net cash

used by investing activities amounted to $180.5 million, compared to $137.1 million used in 2017. Net increases in
loans were $160.2 million in 2018, compared to $132.3 million in 2017. The cash used by lending activities during
2017 can be attributed to the activity in the commercial real estate, commercial and industrial, residential real estate,
and agricultural loan portfolios. Purchases of securities available for sale were $70.9 million in 2018, compared to
$114.6 million in 2017, and proceeds from maturities and sales of securities available for sale were $53.3 million in
2018, compared to $97.6 million in 2017. Net cash of $16.3 million was received as a result of the acquisition of
Monitor in 2017.

Farmers’ primary financing activities are obtaining deposits, repurchase agreements and other borrowings.
Net cash provided by financing activities amounted to $140.9 million for 2018, compared to $122.4 million in 2017.
The majority of this increase can be attributed to the net change in deposits. The increase in deposits was $195
million in 2018 compared to an increase of $45.4 million in 2017. Short-term borrowings decreased $44.8 million
in 2018 compared to an increase of $91.1 million in 2018. The decrease in short-term borrowings is mainly a result
of the growth in deposit balances, which allowed the Company to pay down short-term Federal Home Loan Bank
Advances during the year.

Loan Portfolio

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. Balances include unamortized loan origination fees and costs.

2018

Years Ended December 31,
Commercial Real Estate.................... $ 578,181 33.3% $ 512,502 32.5% $ 445,966 31.2% $ 408,534 31.5% $222,573 33.5%
219,973 13.9
Commercial.......................................
468,884 29.7
Residential Real Estate .....................
212,935 13.5
Consumer ..........................................
Agricultural .......................................
163,087 10.4
Total Loans ....................................... $1,735,840 100.0% $1,577,381 100.0% $1,427,635 100.0% $1,296,865 100.0% $663,852 100.0%

120,139 18.1
183,853 27.7
137,276 20.7
11 0.0

244,742 14.1
492,133 28.4
221,795 12.8
198,989 11.4

199,457 15.4
394,582 30.4
185,077 14.3
109,215 8.4

204,359 14.3
430,195 30.1
218,100 15.3
129,015 9.1

2017

2014

2015

2016

The following schedule sets forth maturities based on remaining scheduled repayments of principal for

commercial and commercial real estate loans listed above as of December 31, 2018:

Types of Loans

1 Year or less

Commercial ................................................................... $
Commercial Real Estate ................................................ $
Agricultural.................................................................... $

58,805 $
17,490 $
18,369 $

1 to 5 Years Over 5 Years
63,460
426,899
152,285

122,477 $
133,792 $
28,335 $

The amounts of commercial, commercial real estate and agricultural loans as of December 31, 2018, based on

remaining scheduled repayments of principal, are shown in the following table:

Loan Sensitivities

1 Year or less Over 1 Year

Total

Floating or Adjustable Rates of Interest ........................ $
Fixed Rates of Interest...................................................
Total Loans .................................................................... $

68,989 $
25,675
94,664 $

593,881 $
333,367
927,248 $

662,870
359,042
1,021,912

Total loans were $1.7 billion at year-end 2018, compared to $1.6 billion at year-end 2017. Loans grew 10%

organically during the past twelve months. The organic increase in loans is a direct result of Farmers’ focus on loan
growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline. Most of the
increase in loans has occurred in the commercial real estate, agricultural, residential real estate and commercial loan
portfolios. Loans comprised 78.7% of the Bank’s average earning assets in 2018, compared to 77.7% in 2017. The
Company has also experienced growth in its originated loans portfolio as a result of loans previously acquired from
earlier bank mergers being renewed and recorded into the originated book. The product mix in the loan portfolio
includes commercial loans comprising 14.1%, residential real estate loans 28.4%, commercial real estate loans
33.3%, consumer loans 12.8% and agricultural loans 11.4% at December 31, 2018, compared with 13.9%, 29.7%,
32.5%, 13.5% and 10.4%, respectively, at December 31, 2017.

Loans contributed 85.7% of total taxable equivalent interest income in 2018 and 84.3% in 2017. Loan yields
were 4.91% in 2018, 40 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 that
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. Commercial loans at December 31, 2018 increased 11.3% from year-
end 2017 with outstanding balances of $244.7 million. 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, business types
and local municipalities. 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 and small business lines of credit.

Residential real estate mortgage loans increased 5% to $492.1 million at December 31, 2018, compared to

$468.9 million in 2017. Farmers originated both fixed rate and adjustable rate mortgages during 2018. Fixed rate
terms are generally limited to fifteen-year terms while adjustable rate products are offered with maturities up to
thirty years.

Commercial real estate loans increased from $512.5 million at December 31, 2017 to $578.2 million at
December 31, 2018, an increase of $65.7 million or 12.8%. The Company’s commercial real estate loan portfolio
includes loans for owner occupied and non-owner occupied real estate. These loans are made to finance properties
such as office and industrial buildings, hotels and retail shopping centers.

The growth in the commercial and commercial real estate loan portfolios was consistent with the

improvements in the local economy. Several new projects announced in the Company’s market area, along with
relatively decreased levels of unemployment have led small business owners to expand or make additional
investments in their operations.

Agricultural loans increased from $163.1 million in 2017 to $199.0 million in 2018, an increase of $35.9
million or 22%. The Company’s agricultural loan portfolio contains a diverse mix of dairy, crops, land, poultry and
cattle loans.

Summary of Loan Loss Experience

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

Years Ended December 31,
Balance at Beginning of Year............................ $
Charge-Offs:

2018
12,315

2017
10,852

2016
8,978

2015
7,632

2014
7,568

0
(220)
(318)
(2,318)
(2,856)

(207)
(375)
(162)
(2,542)
(3,286)

(349)
(245)
(188)
(2,019)
(2,801)

Recoveries on Previous Charge-Offs:

Commercial Real Estate...............................
Commercial..................................................
Residential Real Estate.................................
Consumer .....................................................
Total Recoveries ..........................................
Net Charge-Offs ................................................
Provision For Loan Losses ................................
Balance at End of Year...................................... $
Ratio of Net Charge-offs to Average
Loans Outstanding..........................................
Allowance for Loan Losses/Total Loans...........

126
190
148
669
1,133
(1,723)
3,000
13,592

592
66
100
641
1,399
(1,887)
3,350
12,315

15
45
112
633
805
(1,996)
3,870
$ 10,852

0.10%
0.78

0.13%
0.78

0.15%
0.76

0.22%
0.69

0.28%
1.15

(536)
(290)
(320)
(2,058)
(3,204)

130
9
122
779
1,040
(2,164)
3,510
8,978

(151)
(185)
(585)
(2,213)
(3,134)

125
29
77
1,087
1,318
(1,816)
1,880
7,632

Provisions charged to operations amounted to $3 million in 2018, compared to $3.4 million in 2017, a
decrease of $350 thousand. This decrease is primarily due to the lower level of net charge-offs as a percentage of
loans outstanding in 2018. Net charge-offs for the year ended December 31, 2018 were $1.7 million, $164 thousand
or 8.7% less than net charge-offs for the year ended December 31, 2017. The allowance for loan losses to total
loans remained at 0.78% at December 31, 2018 and 2017. When the acquired loans from previous mergers are
excluded the ratio is 0.92% at December 31, 2018 and 0.97% at December 31, 2017, and compares similarly with
the periods prior to 2016 presented in the above table. Additionally, when loans collectively evaluated for
impairment, which excludes acquired loans, are compared to the allowance for loan losses for loans collectively
evaluated for impairment the ratio is 0.96% for the year ended December 31, 2018, compared to 0.97% for the year
ended December 31, 2017. Nonperforming loans to total loans decreased slightly from 0.49% at December 31, 2017
to 0.45% at December 31, 2018. In determining the estimate of the allowance for loan losses, management
computes the historical loss percentage based upon the loss history of the past 12 quarters. The Company believes
that using a loss history of the previous 12 quarters helps mitigate volatility in the timing of charge-offs and better
reflects probable incurred losses.

The provision for loan 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 charge-off 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 loan losses increased $1.3 million during the year. Aside from the various credit quality

metrics discussed above, another reason for the increase in the current year allowance for loan losses was an
increase in the size of the loan portfolio. Loan growth in 2018 amounted to 10%.

At December 31, 2018, commercial loans collectively evaluated for impairment totaled $264.2 million with an
allowance allocation of $2.1 million compared to commercial loans collectively evaluated for impairment of $225.3
million with an allowance for loan losses of $2.0 million at December 31, 2017. The commercial loan portfolio
experienced a provision of $112 thousand, compared to a $446 thousand provision in 2017. Impaired loans are
carried at the fair value of the underlying collateral, less estimated disposition costs, if repayment of the loan is
expected to be solely dependent on the sale of the collateral. Otherwise, impaired loans are carried at the present
value of expected cash flows.

Typically, commercial and commercial real estate loans are identified as impaired when they become ninety

days past due, or earlier if management believes it is probable that the Company will not collect all amounts due
under the terms of the loan agreement. When Farmers identifies a loan as impaired and concludes that the loan is
collateral dependent, Farmers performs an internal collateral valuation as an interim measure. Farmers typically
obtains an external appraisal to validate its internal collateral valuation as soon as is practical and adjusts the
associated specific loss reserve, if necessary.

The ratio of the allowance for loan losses to non-performing loans at December 31, 2018 improved to
175.81%, compared to 160.04% at December 31, 2017. Increases in nonaccrual loans in the residential real estate
loan and agricultural loan portfolios were offset by decreases in the commercial real estate and commercial loan
portfolios. The balance in the allowance for loan losses increased in 2018, with the increased loan portfolio size, to
$13.6 million compared to $12.3 million in 2017.

Nonperforming Assets
December 31,
Nonaccrual loans:

2018

2017

2016

2015

2014

Commercial Real Estate ......................................... $ 422
Commercial ............................................................
946
4,166
Residential Real Estate ...........................................
495
Consumer................................................................
736
Agricultural ............................................................
Total Nonaccrual Loans ......................................... $ 6,765
Loans Past Due 90 Days or More ................................
966
Total Nonperforming Loans ........................................ $ 7,731

0
Other Real Estate Owned.............................................
Total Nonperforming Assets........................................ $ 7,731

717
1,192
4,038
660
56
6,663
1,032
7,695

$ 1,410
1,361
2,636
396
686
$ 6,489
1,681
$ 8,170

$ 3,803
1,609
3,116
457
73
$ 9,058
1,387
$10,445

$ 3,273
1,645
2,881
126
83
$ 8,008
473
$ 8,481

171
7,866

482
$ 8,652

942
$11,387

148
$ 8,629

Loans modified in troubled debt restructurings ........... $ 5,520
TDRs included in Nonaccrual Loans........................... $ 2,997
Percentage of Nonperforming Loans to Total Loans.....
Percentage of Nonperforming Assets to Total Assets ...
Loans Delinquent 30-89 days ......................................
Percentage of Loans Delinquent 30-89 days to
Total Loans ...............................................................

0.45%
0.33%
8,877

0.51%

4,980
2,624
0.49%
0.36%

$ 7,007
$ 3,113

$ 9,325
$ 4,733

$ 8,110
$ 1,436

0.57%
0.44%

0.81%
0.61%

1.28%
0.76%
5,426

10,191

12,746

9,129

0.65%

0.89%

0.70%

0.82%

The Company has forgone interest income of approximately $440 thousand from nonaccrual loans as of
December 31, 2018 that would have been earned, over the life of the loans, if all loans had performed in accordance
with their original terms.

Net charge-offs as a percentage of average loans outstanding decreased from 0.13% for 2017 to 0.10% for
2018 as a result of the larger loan portfolio and improved loan quality. Net charge-offs decreased from $1.9 million
in 2017 to $1.7 million in 2018. An increase in gross charge-offs was experienced in the residential real estate loan
portfolios of $156 thousand, but that was offset by decreases in the commercial real estate, commercial and
industrial and consumer loan portfolios of $207 thousand, $155 thousand and $224 thousand, respectively.

$
$

The following table summarizes the Company’s allocation of the allowance for loan losses for the past five

years:

December 31,

2018
Loans to

2017

2016

2015

2014

Amount Total Loans

Loans to
Amount Total Loans

Commercial Real Estate .... $ 5,036
Commercial..................... 2,093
Residential Real Estate ... 2,837
Consumer ........................ 2,963
663
Unallocated .....................
$13,592

42.1% $ 4,260
2,011
16.8
2,521
28.3
2,848
12.8
675
0
100.0% $12,315

40.0% $ 3,577
1,874
16.8
2,205
29.7
2,766
13.5
430
0
100.0% $10,852

37.4% $ 3,127
1,373
17.2
1,845
30.1
2,160
15.3
473
0
100.0% $ 8,978

37.5% $ 2,676
1,420
17.8
1,689
30.4
1,663
14.3
184
0
100.0% $ 7,632

33.5%
18.1
27.7
20.7
0

100.0%

The allowance allocated to each of the four loan categories should not be interpreted as an indication that

charge-offs in 2018 occurred in the same proportions or that the allocation indicates future charge-off trends. The
allowance allocated to the one-to-four family real estate loan category and the consumer loan category is based upon
the Company’s allowance methodology for homogeneous loans, and increases and decreases in the balances of those
portfolios. In previous years, the indirect installment loan category has represented the largest percentage of loan
losses. The consumer loan category represents approximately 12.8% of total loans and in 2018, the gross charge-
offs accounted for 81.2% of the losses of the entire loan portfolio. For the commercial loan category, which
represents 16.8% of the total loan portfolio, management relies on the Bank’s internal loan review procedures and
allocates accordingly based on loan classifications. The gross charge-offs in the commercial loan portfolio, was
$220 thousand for 2018.

There were no loans other than those identified above, that management has known information about
possible credit problems of borrowers and their ability to comply with the loan repayment terms. Management is
actively monitoring certain borrowers’ financial condition and loans which management wants to more closely
monitor due to special circumstances. These loans and their potential loss exposure have been considered in
management’s analysis of the adequacy of the allowance for loan losses.

Loan Commitments and Lines of Credit

In the normal course of business, the Bank 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, but an annual fee of two percent is charged for the
issuance of a letter of credit.

As of December 31, 2018, there were no concentrations of loans exceeding 10% of total loans that are not

disclosed as a category of loans. As of that date, there were also no other interest-earning assets that are either
nonaccrual, past due, restructured or non-performing.

Investment Securities

The investment securities portfolio increased $10.8 million in 2018. This increase is a result of asset growth

in 2018 and maintaining the security portfolio at a constant level, as a percentage of total assets. The Company’s
investment strategy is to maintain a diverse investment security portfolio with a higher concentration in tax-free
municipal securities and mortgage-backed securities that are issued by U.S. Government sponsored enterprises.
Farmers sold $16.2 million in securities in 2018, resulting in net security gains of $271 thousand. Farmers
recognized market appreciation on faster paying mortgage-backed securities and recognized losses on lower rated
municipal securities, and reinvested in new mortgage-backed securities and higher rated municipal securities to
further diversify the securities portfolio. During 2014, the Company created the Investment subsidiary to hold
municipal securities and take advantage of more favorable tax treatment. At December 31, 2018, the Investment
entity had a balance of $97.4 million in general market municipal securities.

Farmers’ objective in managing the investment portfolio is to preserve and enhance corporate liquidity

through investment in primarily 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 Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated

with a depository institution, subject to certain exceptions. The Bank does not engage in any of the trading activities
or own any of the types of funds regulated by the Volcker Rule.

Mortgage-backed securities are created by the pooling of mortgages and issuance of a security. Mortgage-

backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages.
Prepayment estimates for mortgage-backed securities are performed at purchase to ensure that prepayment
assumptions are reasonable considering the underlying collateral for the mortgage-backed securities at issue and
current mortgage interest rates and to determine the yield and estimated maturity of the mortgage-backed security
portfolio. Prepayments that are faster than anticipated may shorten the life of the security and may result in faster
amortization of any premiums paid and thereby reduce the net yield on such securities. During periods of increasing
mortgage interest rates, refinancing generally slows as do the prepayments of the underlying mortgages and the
related security. All holdings of mortgage-backed securities were issued by U.S. Government sponsored enterprises.

The following table shows the carrying value of investment securities by type of obligation at the dates

indicated:

Type

December 31,
U.S. Treasury securities...................................................................................... $
U.S. government sponsored enterprise debt securities .......................................
Mortgage-backed securities - residential and collateralized
mortgage obligations .......................................................................................
Small Business Administration...........................................................................
Obligations of states and political subdivisions..................................................
Corporate bonds..................................................................................................
Equity securities..................................................................................................
Other investments measured at net asset value...................................................

2018
1,447 $
4,562

171,119
11,930
211,944
1,188
495
6,635
409,320 $

2017
4,278
4,639

177,571
14,212
191,003
1,234
394
5,185
398,516

A summary of debt securities held at December 31, 2018 classified according to maturity and including

weighted average yield for each range of maturities is set forth below:

Type and Maturity Grouping

U.S. Treasury securities

Maturing within one year ............................................................................................................... $
Maturing after one year but within five years ................................................................................
Maturing after five years but within ten years................................................................................

Total U.S. Treasury securities..................................................................................................... $

U.S. government sponsored enterprise debt securities

Total U.S. government sponsored enterprise debt securities ...................................................... $

Mortgage-backed securities - residential and collateralized mortgage
obligations (2)

Total mortgage-backed securities ............................................................................................... $

Small Business Administration

Total small business administration............................................................................................ $

Obligations of states and political subdivisions

Total obligations of states and political subdivisions ................................................................. $

Corporate bonds

Total other securities................................................................................................................... $

December 31, 2018

Fair Value

Weighted Average
Yield (1)

447
707
293
1,447

1,241
2,316
955
50
4,562

21,634
64,268
50,340
34,877
171,119

10
5,269
6,651
11,930

3,734
37,750
145,421
25,039
211,944

179
908
101
1,188

1.63%
2.10%
2.12%
1.96%

1.43%
2.02%
2.89%
4.30%
2.07%

2.48%
2.50%
2.62%
2.79%
2.59%

3.89%
2.37%
1.93%
2.12%

2.78%
3.50%
3.94%
3.78%
3.82%

3.89%
2.37%
1.93%
2.12%

(1)

The weighted average yield has been computed by dividing the total contractual 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 new statutory tax rate of 21% as written in the Tax Cuts and Jobs Act were $21 thousand, $259 thousand,
$1.2 million and $202 thousand for the four ranges of maturities.

(2)

Payments based on contractual maturity.

Premises and Equipment

Premises and equipment had a net decrease of $1.1 million in 2018 as a result of depreciation of $1.5 million.

This was offset by new additions of premises and equipment amounting to $450 thousand.

Deposits

Deposits represent the Company’s principal source of funds. The deposit base consists of demand deposits,

savings, money market accounts and other time deposits, including $25 million in brokered time deposits which
were added for the first time in 2018. During the year, the Company’s average total deposits increased from $1.559
billion in 2017 to $1.681 billion in 2018, representing an increase of 7.8%. Noninterest demand deposits increased
$25.7 million in 2018. Average interest bearing demand deposits increased $101.0 million, which was offset by a
decrease in savings deposits of $55.8 million since December 31, 2017. With interest rates increasing during 2018,
customers had more incentive to commit funds to term deposit accounts. Average time deposits increased $51.1
million in 2018. The Company’s focus is on core deposit growth and Farmers will continue to price deposit rates to
remain competitive within the market and to retain customers. At December 31, 2018, core deposits – savings and
money market accounts, time deposits less than $250 thousand, demand deposits and interest bearing demand
deposits represented approximately 93.8% of total deposits.

Bank Owned Life Insurance

Farmers’ owns bank owned life insurance policies on the lives of certain members of management. The

purpose of this investment is to help fund the costs of employee benefit plans. The cash surrender value of these
policies was $34.8 million at December 31, 2018, compared to $33.9 million at December 31, 2017.

Borrowings

Average short-term borrowings decreased $44.8 million or 15.5% since December 31, 2017 as a result of loan

growth outpacing deposit growth in 2018. The decrease was a result of the nearly $70 million of securities sold
under repurchase agreements converting to interest bearing checking accounts. This was offset by the $25 million
increase in short-term Federal Home Loan Advances (“FHLB”). Average Long-term borrowings decreased $1.0
million as maturing FHLB advances were refinanced with short-term advances to capitalize on the favorable interest
rates. See Note 11 and 12 within Item 8 of this Annual report on Form 10-K for additional detail.

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

The following table presents, as of December 31, 2018, the Company’s significant fixed and determinable
contractual obligations by payment date. The payment amounts represent those amounts contractually due to the
recipient and do not include any unamortized premiums or discounts or other similar carrying value adjustments.
Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial
statements.

Commitments
12/31/2018

Deposits without maturity.......
Certificates of deposit and
brokered time deposits ............
Repurchase agreements...........
Short-term borrowed funds .....
Short-term FHLB advances ....
Long-term borrowings ............
Operating leases ......................

Note
Ref.

9
11
11
11
12
8

2019
$ 1,427,260

172,193
4,409
350
240,000
996
453

2020

2021

2022

2023

Thereafter

86,876

63,455

15,934

26,862

7,140

860
394

792
381

729
250

398
146

2,258
711

There is also a $2 million additional commitment to SBIC investment funds over the next several years. The

payments have no predetermined due dates at year end 2018. Note 13 to the consolidated financial statements
discusses in greater detail other commitments and contingencies and the various obligations that exists under those
agreements. Examples of these commitments and contingencies include commitments to extend credit and standby
letters of credit.

At December 31, 2018, the Company did not engage in derivatives or hedging contracts that may expose the

Company to liabilities greater than the amounts recorded on the consolidated balance sheet. Management’s policy is
to not engage in derivatives contracts for speculative trading purposes. The Company does utilize interest-rate
swaps as a way of helping manage interest rate risk and not as derivatives for trading purposes. See Note 21 within
Item 8 of this Annual report on Form 10-K for additional detail.

Capital Resources

Total Stockholders’ Equity increased 8.4% from $242.1 million at December 31, 2017 to $262.3 million in

2018. The increase is due to the net income addition to retained earnings less the amount of dividends paid. During
the year, shareholders received a total of $0.30 per share cash dividends paid in the past four quarters, a 36.4%
increase compared to the $0.22 cash dividend per share paid in 2017. Book value increased 7.4% from $8.79 per
share at December 31, 2017 to $9.44 per share at December 31, 2018. The Company’s tangible book value also
increased from $7.14 per share at December 31, 2017 to $7.86 per share at December 31, 2018, an increase of
10.1%.

The Bank, as a national chartered bank, is subject to the dividend restrictions set forth by the OCC. The OCC
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). Farmers and Farmers Bank are required to maintain minimum amounts of
capital to total “risk weighted” assets, as defined by the banking regulators. At December 31, 2018, under the new
minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III),
Farmers Bank and Farmers are required to have minimum capital ratios. Actual and minimum ratios are detailed in
Note 15 of the Consolidated Financial Statements. Farmers Bank and Farmers had capital ratios above the
minimum levels at December 31, 2018 and 2017. At year-end 2018 and 2017, the most recent regulatory
notifications categorized Farmers Bank as well capitalized under the regulatory framework for prompt corrective
action.

During 2013, the Federal banking regulators approved a final rule to implement revised capital adequacy
standards of the Basel Committee on Banking Supervision, commonly called Basel III, and to address relevant
provisions of the Dodd-Frank Act. The final rule strengthens the definition of regulatory capital, increases risk-
based capital requirements, makes selected changes to the calculation of risk-weighted assets, and adjusts the prompt
corrective action thresholds. Community banking organizations, such as the Company and the Bank, became
subject to the new rule on January 1, 2015 and certain provisions of the new rule will be phased in over the period of
2015 through 2019. The Bank has retained, through a one-time election, the prior treatment for most accumulated
other comprehensive income, such that unrealized gains and losses on securities available for sale that did not affect
regulatory capital amounts and ratios. As mentioned in the prior paragraph, the Bank falls within the new regulatory
capital ratio guidelines.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with generally
accepted accounting principles in the United States of America and conform to general practices within the banking
industry. Some of these accounting policies are considered to be critical accounting policies. Critical accounting
policies are those policies that require management’s most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has
identified three accounting policies that are critical accounting policies and an understanding of these policies is
necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance
for loan losses, if there is any impairment of goodwill and other intangibles, and estimating the fair value of assets
acquired and liabilities assumed in connection with any merger activity. Additional information regarding these
policies is included in the notes to the consolidated financial statements, including Note 1 (Summary of Significant
Accounting Policies), Note 4 (Loans) and Note 2 (Business Combinations), and the section above captioned “Loan
Portfolio.” Management believes that the judgments, estimates and assumptions used in the preparation of the
consolidated financial statements are appropriate given the factual circumstances at the time.

Farmers maintains an allowance for loan losses. The allowance for loan losses is presented as a reserve

against loans on the balance sheets. Loan losses are charged off against the allowance for loan losses, while
recoveries of amounts previously charged off are credited to the allowance for loan losses. A provision for loan
losses is charged to operations based on management’s periodic evaluation of adequacy of the allowance. The
provision for credit losses provides for probable losses on loans.

Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates

related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of current economic trends and
conditions, all of which may be susceptible to significant change. The loan portfolio represents the largest asset
category on the consolidated balance sheets. Management’s assessment of the adequacy of the allowance for loan
losses considers individually impaired loans, pools of homogeneous loans with similar risk characteristics and other
environmental risk factors.

Pools of homogeneous loans with similar risk characteristics are assessed for probable losses. Probable losses
are estimated through application of historical loss experience. Historical loss experience data used to establish loss
estimates may not precisely correspond to the current portfolio. As a result, the historical loss experience used in the
allowance analysis may not be representative of actual unrealized losses inherent in the portfolio.

Management also evaluates the impact of environmental factors which pose additional risks that may not

adequately be addressed in the analyses described above. Such environmental factors could include: levels of, and
trends in, delinquencies and impaired loans, charge-offs and recoveries; trends in volume and terms of loans; effects
of any changes in lending policies and procedures including those for underwriting, collection, charge-off and
recovery; experience, ability, and depth of lending management and staff; national and local economic trends and
conditions; industry and geographic conditions; concentrations of credit such as, but not limited to, local industries,
their employees and suppliers; or any other common risk factor that might affect loss experience across one or more
components of the portfolio. The determination of this component of the allowances requires considerable
management judgment. To the extent actual outcomes differ from management estimates, additional provision for
credit losses could be required that could adversely affect earnings or financial position in future periods. The
“Loan Portfolio” section of this financial review includes a discussion of the factors driving changes in the
allowance for loan losses during the current period.

Management believes that the accounting for goodwill and other intangible assets also involves a higher
degree of judgment than most other significant accounting policies. U.S. GAAP establishes standards for the
amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from
business combinations represents the value attributable to unidentifiable intangible assets in the business acquired.
The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the
ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace. The
goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in
earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over
sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. U.S.
GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the
past and projected operating results for the subsidiaries and comparable industry information. At December 31,
2018, on a consolidated basis, Farmers had intangibles of $5.8 million subject to amortization and $38.2 million of
goodwill, which was not subject to periodic amortization.

Recent Accounting Pronouncements and Developments

Note 1 to the consolidated financial statements discusses new accounting policies adopted by Farmers during
2018 and the expected impact of accounting policies recently issued or proposed but not yet required to be adopted.
To the extent the adoption of new accounting standards materially affects financial condition, results of operations
or liquidity, the impacts are discussed in the applicable sections of this financial review and notes to the consolidated
financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

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 Company, 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. The
Company monitors interest rate sensitive assets and liabilities to determine the overall interest rate position over
various time frames.

The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to
monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income.
The following table shows the effect on net interest income and the net present value of equity in the event of a
sudden and sustained 300 basis point increase and 100 basis point decrease in market interest rates. The
assumptions and predictions include inputs to compute baseline net interest income, growth rates, expected changes
in rates on interest bearing deposit accounts and loans, competition and various other factors that are difficult to
accurately predict.

Changes In Interest Rate (basis points)
Net Interest Income Change

2018
Result

2017
Result

ALCO
Guidelines

+300 .............................................................................................
+200 .............................................................................................
+100 .............................................................................................
-100..............................................................................................

Net Present Value Of Equity Change

1.8%
1.6%
0.9%
-3.0%

15.2%
11.8%
8.2%
-16.6%

-1.9%
-1.0%
-0.5%
-3.3%

-7.5%
-3.7%
0.3%
-7.2%

15%
10%
5%
5%

20%
15%
10%
10%

It should be noted that at December 31, 2018, the change in the net present value of equity exceeded policy
when the simulation model assumed a sudden decrease in rates of 100 basis points (1%). This is primarily due to
the positive impact on the fair value of assets not being as great as the negative impact on the fair value of certain
liabilities. Specifically, because core deposits typically bear relatively low interest rates, their fair value would be
negatively impacted as the rates could not be adjusted by the full extent of the sudden decrease in rates.
Management will continue to monitor the policy exception and may consider changes to the asset/liability position
in the future. The remaining results of the simulations indicate that interest rate change results fall within internal
limits established by the Company at December 31, 2018 and 2017. A report on interest rate risk is presented to the
Board of Directors and the Asset/Liability Committee on a quarterly basis. The Company has no market risk
sensitive instruments held for trading purposes, nor does it hold derivative financial instruments, and does not plan
to purchase these instruments in the near future.

With the largest amount of interest sensitive assets and liabilities maturing within twelve months, the

Company monitors this area most closely. Early withdrawal of deposits, prepayments of loans and loan
delinquencies are some of the factors that can impact actual results in comparison to our simulation analysis. In
addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change
in net interest margin.

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.

Item 8. Financial Statements and Supplementary Financial Data.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Farmers National Banc Corp. (the “Company”) is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-
15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of;
our principal executive and principal financial officers and effected by the board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting principles and
includes those policies and procedures that:

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in the 2013 Internal Control-Integrated Framework. Based on that
assessment, we believe that, as of December 31, 2018, our internal control over financial reporting is effective based
on those criteria.

Crowe LLP has audited the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2018, as stated in their report dated March 5, 2019.

Kevin J. Helmick
President and Chief Executive Officer

Carl D. Culp
Senior Executive Vice President and Treasurer

Crowe(cid:3)LLP(cid:3)
Independent(cid:3)Member(cid:3)Crowe(cid:3)Global(cid:3)

(cid:3)

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of
Farmers National Banc Corp.
Canfield, Ohio

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Farmers National Banc Corp. (the "Company")
as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the
related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal
control over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2018 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control – Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of
the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control
over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

We have served as the Company’s auditor since 2003.

Cleveland, Ohio
March 5, 2019

Crowe LLP

CONSOLIDATED BALANCE SHEETS
(Table Dollar Amounts in Thousands except Per Share Data)

December 31,
ASSETS
Cash and due from banks................................................................................................................... $
Federal funds sold and other ..............................................................................................................
TOTAL CASH AND CASH EQUIVALENTS ...................................................................

Securities available for sale ...............................................................................................................
Equity securities.................................................................................................................................
Loans held for sale .............................................................................................................................
Loans..................................................................................................................................................
Less allowance for loan losses...........................................................................................................
NET LOANS........................................................................................................................

Premises and equipment, net..............................................................................................................
Goodwill ............................................................................................................................................
Other intangibles................................................................................................................................
Bank owned life insurance.................................................................................................................
Other assets ........................................................................................................................................

TOTAL ASSETS ................................................................................................................. $

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:

Noninterest-bearing..................................................................................................................... $
Interest-bearing ...........................................................................................................................
Brokered time deposits................................................................................................................
TOTAL DEPOSITS .............................................................................................................

Short-term borrowings .......................................................................................................................
Long-term borrowings .......................................................................................................................
Other liabilities...................................................................................................................................
TOTAL LIABILITIES.........................................................................................................

Commitments and contingent liabilities (Note 12)

Stockholders' equity

2018

18,042 $
39,884
57,926

402,190
7,130
1,237
1,735,840
13,592
1,722,248

21,211
38,201
5,751
34,758
38,212
2,328,864 $

421,950 $

1,352,770
25,000
1,799,720

244,759
6,033
16,032
2,066,544

2017

17,785
39,829
57,614

392,937
5,579
272
1,577,381
12,315
1,565,066

22,286
38,201
7,168
33,877
36,069
2,159,069

412,346
1,192,373
0
1,604,719

289,565
6,994
15,717
1,916,995

Common Stock - Authorized 50,000,000 shares in 2018 and 35,000,000 in 2017;
issued 28,179,598 in 2018 and 2017........................................................................................
Retained earnings........................................................................................................................
Accumulated other comprehensive income (loss) ......................................................................
Treasury stock, at cost; 387,697 shares in 2018 and 635,550 shares in 2017.............................
TOTAL STOCKHOLDERS' EQUITY................................................................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................................. $

186,163
83,630
(4,030)
(3,443)
262,320
2,328,864 $

186,903
59,208
596
(4,633)
242,074
2,159,069

See accompanying notes

CONSOLIDATED STATEMENTS OF INCOME
(Table Dollar Amounts in Thousands except Per Share Data)

Years ended December 31,
INTEREST AND DIVIDEND INCOME

2018

2017

2016

Loans, including fees ............................................................................................ $
Taxable securities..................................................................................................
Tax exempt securities............................................................................................
Dividends ..............................................................................................................
Federal funds sold and other interest income........................................................
TOTAL INTEREST AND DIVIDEND INCOME........................................

79,835 $
4,928
5,707
652
644
91,766

69,934 $
4,899
4,763
537
394
80,527

INTEREST EXPENSE

Deposits.................................................................................................................
Short-term borrowings ..........................................................................................
Long-term borrowings ..........................................................................................
TOTAL INTEREST EXPENSE ....................................................................
NET INTEREST INCOME ...........................................................................
Provision for loan losses .......................................................................................
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......

NONINTEREST INCOME

Service charges on deposit accounts.....................................................................
Bank owned life insurance income, including death benefits...............................
Trust fees...............................................................................................................
Insurance agency commissions.............................................................................
Security gains, including change in fair value for equity securities .....................
Retirement plan consulting fees............................................................................
Investment commissions .......................................................................................
Net gains on sale of loans .....................................................................................
Debit card and EFT fees........................................................................................
Other operating income.........................................................................................
TOTAL NONINTEREST INCOME .............................................................

NONINTEREST EXPENSE

Salaries and employee benefits .............................................................................
Occupancy and equipment ....................................................................................
State and local taxes..............................................................................................
Professional fees ...................................................................................................
Merger related costs ..............................................................................................
Advertising............................................................................................................
FDIC insurance .....................................................................................................
Intangible amortization .........................................................................................
Core processing charges........................................................................................
Telephone and data ...............................................................................................
Other operating expenses ......................................................................................
TOTAL NONINTEREST EXPENSE............................................................
INCOME BEFORE INCOME TAXES .........................................................

8,139
4,936
190
13,265
78,501
3,000
75,501

4,254
881
7,126
2,621
271
1,684
1,103
2,729
3,351
1,479
25,499

35,976
6,478
1,887
2,856
(155)
1,559
899
1,418
3,073
1,061
7,665
62,717
38,283

4,490
2,167
224
6,881
73,646
3,350
70,296

4,077
831
6,431
2,407
4
1,857
919
3,066
3,089
1,370
24,051

34,759
6,292
1,663
2,891
888
1,527
869
1,494
2,880
973
6,950
61,186
33,161

INCOME TAXES ......................................................................................................

NET INCOME ............................................................................................... $

5,714
32,569 $

10,450
22,711 $

63,109
5,058
3,650
515
166
72,498

3,221
689
468
4,378
68,120
3,870
64,250

4,010
814
6,235
1,560
73
1,990
1,210
2,843
2,661
1,848
23,244

31,908
6,615
1,544
2,757
563
1,462
1,055
1,461
2,699
930
8,458
59,452
28,042

7,485
20,557

EARNINGS PER SHARE:

Basic...................................................................................................................... $
Diluted................................................................................................................... $

1.18 $
1.16 $

0.82 $
0.82 $

0.76
0.76

See accompanying notes.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Table Dollar Amounts in Thousands except Per Share Data)

Years ended December 31,
NET INCOME ............................................................................................................. $

2018
32,569 $

2017
22,711 $

2016
20,557

Other comprehensive income:

Net unrealized holding gains (losses) on available for sale securities ...........
Reclassification adjustment for (gains) losses realized in income.................
Net unrealized holding gains (losses) ...................................................................
Income tax effect............................................................................................
Unrealized holding gains (losses), net of reclassification and tax ........................

Change in funded status of post-retirement health plan........................................
Income tax effect............................................................................................
Change in funded status of post-retirement health plan, net of tax.......................

(5,343)
(283)
(5,626)
1,169
(4,457)

0
0
0

5,107
(4)
5,103
(1,786)
3,317

(55)
19
(36)

(4,270)
(73)
(4,343)
1,520
(2,823)

(156)
55
(101)

Other comprehensive income (loss), net of tax.....................................................

(4,457)

3,281

(2,924)

TOTAL COMPREHENSIVE INCOME ..................................................................... $

28,112 $

25,992 $

17,633

See accompanying notes.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Table Dollar Amounts in Thousands except Per Share Data)

Years ended December 31,
COMMON STOCK

2018

2017

2016

Balance at beginning of year ......................................................................................... $

186,903 $

178,317 $

176,287

Issued 247,853 in 2018 and 18,928 in 2017 treasury shares under the Long
Term Incentive Plan................................................................................................
Issued 465,787 shares in 2017 and 123,280 in 2016 as part of
business combinations ............................................................................................
Stock compensation expense for unvested shares .....................................................
Balance at end of year ...................................................................................................

(2,415 )

(133 )

0
1,675
186,163

6,358
2,361
186,903

1,138
892
178,317

RETAINED EARNINGS

Balance at beginning of year .........................................................................................
Cumulative effect adjustment upon adoption of ASU 2016-01.................................
Beginning balance adjusted ...........................................................................................
Net income .................................................................................................................
Decrease as a result of shares issued under the Long Term Incentive Plan ..............
Increase as a result of a contingent payment as part of a business combination .......
Reclassification of disproportionate tax effects.........................................................
Dividends declared: $.30 cash dividends per share in 2018, $.22 per share
in 2017 and $.16 per share in 2016 .........................................................................
Balance at end of year ...................................................................................................

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

TREASURY STOCK, AT COST

Balance at beginning of year .........................................................................................
Issued 11,669 shares in contingent payments as part of a business combination......
Reissued 324,978 and 18,928 shares in 2018 and 2017 under the
Long Term Incentive Plan ......................................................................................
Purchased 19,900 shares in 2016 ...............................................................................
Retained 77,125 shares to cover tax withholdings under the
Long Term Incentive Plan ......................................................................................
Balance at end of year ...................................................................................................
TOTAL STOCKHOLDERS' EQUITY AT END OF YEAR ......................................... $

59,208
169
59,377
32,569
0
0
0

(8,316 )
83,630

596
(169 )
427
0
(4,457 )
(4,030 )

(4,633 )
0

2,415
0

42,547
0
42,547
22,711
(5 )
73
(106 )

(6,012 )
59,208

(2,791 )
0
(2,791 )
106
3,281
596

(4,857 )
85

139
0

26,316
0
26,316
20,557
0
0
0

(4,326 )
42,547

133
0
133
0
(2,924 )
(2,791 )

(4,689 )
0

0
(168 )

(1,225 )
(3,443 )
262,320 $

0
(4,633 )
242,074 $

0
(4,857 )
213,216

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Table Dollar Amounts in Thousands except Per Share Data)

2018

2017

2016

32,569 $

22,711 $

20,557

Years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES

Net income ............................................................................................................ $
Adjustments to reconcile net income to net cash from operating
activities:

Provision for loan losses ................................................................................
Depreciation and amortization .......................................................................
Net amortization of securities ........................................................................
Available for sale security gains ....................................................................
Realized and unrealized gains on equity securities........................................
Loss (gain) on land and building sales, net ....................................................
Stock compensation expense..........................................................................
Loss on sale of other real estate owned..........................................................
Earnings on bank owned life insurance..........................................................
Origination of loans held for sale...................................................................
Proceeds from loans held for sale ..................................................................
Net gains on sale of loans...............................................................................
Net change in other assets and liabilities .......................................................
NET CASH FROM OPERATING ACTIVITIES ..................................

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from maturities and repayments of securities available for
sale...............................................................................................................
Proceeds from sales of securities available for sale .......................................
Purchases of securities available for sale .......................................................
Proceeds from sale of equity securities ..........................................................
Purchases of equity securities ........................................................................
Purchases of restricted stock ..........................................................................
Loan originations and payments, net..............................................................
Proceeds from sale of other real estate owned ...............................................
Purchase of bank owned life insurance ..........................................................
Proceeds from land and building sales...........................................................
Additions to premises and equipment ............................................................
Net cash (paid) received in business combinations ........................................
NET CASH FROM INVESTING ACTIVITIES ...................................

CASH FLOWS FROM FINANCING ACTIVITIES

Net change in deposits....................................................................................
Net change in short-term borrowings.............................................................
Repayments of long-term borrowings............................................................
Cash dividends paid .......................................................................................
Repurchase of common shares........................................................................
NET CASH FROM FINANCING ACTIVITIES....................................
NET CHANGE IN CASH AND CASH EQUIVALENTS .....................

3,000
2,991
2,798
(283)
12
0
1,675
(16)
(881)
(79,007)
80,771
(2,729)
(911)
39,989

37,012
16,162
(69,241)
79
(1,642)
(1,246)
(160,204)
209
0
0
(450)
0
(179,321)

195,001
(44,806)
(1,010)
(8,316)
(1,225)
139,644
312

3,350
3,139
1,823
(4)
0
53
2,361
20
(831)
(56,810)
59,959
(3,066)
(2,139)
30,566

43,104
54,497
(114,600)
0
0
(842)
(132,597)
643
(3,000)
439
(956)
16,203
(137,109)

45,377
91,105
(8,091)
(6,012)
0
122,379
15,836

Beginning cash and cash equivalents .............................................................

Ending cash and cash equivalents .................................................................. $

57,614
57,926 $

41,778
57,614 $

Supplemental cash flow information:

Interest paid .................................................................................................... $
Income taxes paid ........................................................................................... $

12,906 $
7,300 $

6,754 $
8,800 $

Supplemental noncash disclosures:

Transfer of loans and property to other real estate owned ............................. $
Issuance of stock for business combinations.................................................. $
Issuance of stock awards ................................................................................ $
Security purchases not settled ........................................................................ $
Contingent consideration for business combination ...................................... $

22 $
0 $
2,415 $
1,642 $
180 $

279 $
6,358 $
139 $
0 $
85 $

See accompanying notes.

3,870
3,667
2,216
(73)
0
(238)
892
277
(814)
(64,599)
68,856
(2,843)
(7,273)
24,495

59,904
11,493
(52,628)
0
0
(200)
(133,248)
665
0
479
(788)
(1,073)
(115,396)

115,709
(27,372)
(7,178)
(4,326)
(168)
76,665
(14,236)

56,014
41,778

4,316
9,410

482
1,138
0
927
880

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table Dollar Amounts in Thousands except Per Share Data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of Farmers National Banc
Corp. and its wholly-owned subsidiaries, The Farmers National Bank of Canfield (“Bank” or “Farmers Bank”),
Farmers Trust Company (“Farmers Trust”), National Associates, Inc. (“NAI”) and Farmers National Captive, Inc.
(“Captive”). Captive was formed during 2016 and is a wholly-owned insurance subsidiary of the Company. The
consolidated financial statements also include the accounts of the Bank’s subsidiaries; Farmers National Insurance,
LLC (“Farmers Insurance”) and Farmers of Canfield Investment Co. (“Farmers Investments”). The Company
acquired Monitor Bancorp, Inc. (“Monitor”), the holding company of Monitor Bank in 2017 and consolidated the
activity within the Bank. The Bank acquired Bowers Insurance Agency, Inc. (“Bowers”) and consolidated the
activity of Bowers with Farmers Insurance during 2016, see Note 2. Together all entities are referred to as “the
Company.” All significant intercompany balances and transactions have been eliminated in consolidation.

Nature of Operations: The Company provides full banking services, including wealth management services and
mortgage banking activity, through the Bank. 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 primary area served by the
Bank is the northeastern region of Ohio through thirty nine (39) locations and two-branch location in southwestern
Pennsylvania. The Company provides trust services through its Farmers Trust subsidiary, retirement consulting
services through its NAI subsidiary and insurance services through the Bank’s Insurance subsidiary. Farmers Trust
has a state-chartered bank license to conduct trust business from the Ohio Department of Commerce – Division of
Financial Institutions. The primary purpose of Farmers Investments is to invest in municipal securities. Captive
provides property and casualty insurance coverage to the Company and its subsidiaries. Captive pools resources
with thirteen similar insurance subsidiaries of financial institutions to spread a limited amount of risk among the
pool members and to provide insurance where not currently available or economically feasible in today’s insurance
market place.

Estimates: The preparation of financial statements in conformity with U.S. 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 Flows: Cash and cash equivalents include cash on hand, deposits with other financial institutions and federal
funds sold. Generally, federal funds are purchased and sold for one-day periods. Net cash flows are reported for
loan and deposit transactions, short-term borrowings and other assets and liabilities.

Securities: Debt securities are classified as available for sale when they might be sold before maturity. Securities
available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive
income, net of tax. Equity securities with readily determinable fair values are carried at fair value, with changes in
fair value reported in net income. Prior to 2018, equity securities with readily determinable fair values were
classified as available for sale, carried at fair value with unrealized holding gains and losses reported in other
comprehensive income, net of tax.

On January 1, 2018, the Company adopted the new accounting standard for Financial Instruments, which requires
equity investments to be measured at fair value with changes in fair value recognized in net income. The adoption
of this guidance resulted in a $169 thousand increase to beginning retained earnings and a $169 thousand decrease to
accumulated other comprehensive income.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are
amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the
specific identification method. Purchases are recorded on the trade date.

Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis, and
more frequently when economic or market conditions warrant. For securities in an unrealized loss position,
management considers the extent and duration of the unrealized loss, and the financial condition and near-term
prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will
be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of
the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value
is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the
amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be
recognized in the income statement and 2) OTTI related to other factors, which is recognized in other
comprehensive income. The credit loss is defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized
losses, if any, are charged to earnings.

Mortgage loans held for sale are sold with or without servicing rights released. Gains and losses on sales of
mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for
loan losses. Substantially all loans are secured by specific items of collateral including business assets, consumer
assets, and commercial and residential real estate.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless
the loan is well secured and in process of collection. Consumer loans are typically charged off no later than 120
days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual
loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired loans.

For all classes of loans, when interest accruals are discontinued, interest accrued but not received for loans placed on
non-accrual is reversed against interest income. Interest on such loans is thereafter recorded on a cash-basis or cost-
recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments are reasonably assured.

Purchased Credit Impaired Loans: The Company purchased loans that have shown evidence of credit deterioration
since origination. These loans were recorded at the amount paid, such that there is no carryover of the seller’s
allowance for loan losses. The Company estimates the amount and timing of expected cash flows for each loan, and
the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan.
The excess of the loan’s contractual principal and interest over expected cash flows is not recorded.

Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows
is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected
cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Derivatives: Derivative financial instruments are recognized as assets or liabilities at fair value. The Company’s
derivatives are interest-rate swap agreements, which are used as part of its asset and liability management strategy to
help manage its interest rate risk position. The Company does not use derivatives for trading or balance sheet
hedging purposes. The derivative transactions are considered instruments with no hedging designation, otherwise
known as stand-alone derivatives. Changes in the fair value of the derivatives are reported currently in earnings, as
other noninterest income.

Concentration of Credit Risk: There are no significant concentrations of loans to any one industry or customer.
However, most of the Company’s business activity is with customers located within Northeastern Ohio. Therefore,
the Company’s exposure to credit risk is significantly affected by changes in the economy of a nine county area.
Loans secured by real estate represent 70.5% of the total portfolio and changes related to the real estate markets are
monitored by management.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred loan
losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. The allowance is
based on management’s judgment taking into consideration past loss experience, reviews of individual loans, 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 allowance. If additions to the original estimate of the allowance for loan losses are deemed
necessary, they will be reported in earnings in the period in which they become reasonably estimable and probable.
Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that,
in management’s judgment, should be charged-off.

Acquired loans are individually evaluated and for those purchased loans without evidence of credit deterioration,
management evaluates each reviewed loan using an internal grading system with a grade assigned to each loan at the
date of acquisition. To the extent that any purchased loan is not specifically reviewed, such loan is assumed to have
characteristics similar to the characteristics of the acquired portfolio of purchased loans. The grade for each
purchased loan without evidence of credit deterioration is reviewed subsequent to the date of acquisition any time a
loan is renewed or extended or at any time information becomes available to the Company that provides material
insight regarding the loan’s performance, the status of the borrower or the quality or value of the underlying
collateral. To the extent that current information indicates it is probable that the Company will collect all amounts
according to the contractual terms thereof, such loan is not considered impaired and is not individually considered in
the determination of the required allowance for loan losses. To the extent that current information indicates it is
probable that the Company will not be able to collect all amounts according to the contractual terms thereof, such
loan is considered impaired and is considered in the determination of the required level of allowance.

In determining the day one fair values of purchased loans without evidence of credit deterioration at the date of
acquisition, management includes (i) no carry-over of any previously recorded allowance for loan losses and (ii) an
adjustment of the unpaid principal balance to reflect an appropriate market rate of interest, given the risk profile and
grade assigned to each loan. This adjustment is accreted into earnings as a yield adjustment, using the effective
yield method, over the remaining life of each loan.

The allowance consists of specific and general components. The specific component relates to loans that are
individually classified as impaired. A loan is considered impaired when, based on the current information and
events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified,
and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and
classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Impairment is measured on a loan by loan basis for commercial and commercial real estate loans over $750
thousand, individually or in the aggregate, by either the present value of expected future cash flows discounted at the
loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans, such as consumer and residential real
estate loans are collectively evaluated for impairment and accordingly, they are not separately identified for
impairment disclosures. Non-real estate secured consumer loans in bankruptcy where debt has not been reaffirmed
are considered troubled debt restructurings and are evaluated individually to ensure that accurate accounting
treatment is in place.

The Company considers the guidance on troubled debt restructuring for individual consumer and residential loans
when evaluating for impairment disclosure. Troubled debt restructurings are measured at the present value of
estimated future cash flow using the loan’s effective rate at inception. If a troubled debt restructuring is considered
to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt
restructurings that subsequently default, the Company determines the amount of reserve in accordance with the
accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current
factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history
experienced for the most recent twelve quarters. The formula for calculating the allowance for loan losses requires
that the historical loss percentage be applied to homogeneous and all risk rated loans. This actual loss experience is
supplemented with other economic factors based on the risks present for each portfolio segment. These economic
factors include consideration of the following: levels of and trends in delinquencies and impaired loans; trends in
volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in
lending policies, procedures and practices; experience, ability and depth of lending management and other relevant
staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit
concentrations. The following portfolio segments have been identified:

Commercial Loans. Commercial credit is extended to commercial customers for use in normal business operations
to finance working capital needs, equipment purchases or other projects. The majority of these borrowers are
customers doing business within our geographic regions. These loans are generally underwritten individually and
secured with the assets of the company and the personal guarantee of the business owners. Commercial loans are
made based primarily on the historical and projected cash flow of the borrower and the underlying collateral
provided by the borrower.

Commercial Real Estate Loans. Commercial real estate loans are subject to underwriting standards and processes
similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans
is largely dependent on the successful operation of the property. Loan performance may be adversely affected by
factors impacting the general economy or conditions specific to the real estate market such as geographic location
and property type.

Consumer Loans. Consumer loans are primarily comprised of loans made directly to consumers and indirectly
through automobile dealerships. These loans have a specific matrix which consists of several factors including debt
to income, type of collateral and loan to collateral value, credit history and relationship with the borrower.
Consumer lending uses risk-based pricing in the underwriting process.

Residential Real Estate Loans. Residential mortgage loans represent loans to consumers for the purchase or
refinance of a residence. These loans are generally financed up to 15 years and in most cases, are extended to
borrowers to finance their primary residence. Real estate market values at the time of origination directly affect the
amount of credit extended and, in the event of default, subsequent changes in these values may impact the severity
of losses.

Servicing Rights: When mortgage loans are sold and servicing rights are retained, the servicing rights are initially
recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on
market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation
model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service,
the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates
and losses. The Company compares the valuation model inputs and results to published industry data to validate the
model results and assumptions.

All classes of servicing assets are subsequently measured using the amortization method which requires servicing
rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net
servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of
the assets compared to carrying amount. Any impairment is reported as a valuation allowance, to the extent that fair
value is less than the capitalized amount for a grouping. There was no valuation allowance impairment against
servicing assets as of December 31, 2018 or 2017.

Servicing fee income is recorded when earned for servicing loans based on a contractual percentage of the
outstanding principal or a fixed amount per loan. The amortization of mortgage servicing rights is netted against
loan servicing fee income. Servicing fees, late fees and ancillary fees related to loan servicing are not considered
significant for financial reporting.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less
costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of
cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance
is recorded through expense. These assets are recorded in other assets on the balance sheets as other real estate
owned (“OREO”). OREO totaled $0 at December 31, 2018 and $171 thousand at December 31, 2017. Operating
costs after acquisition are expensed.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost, less accumulated
depreciation. Buildings and related components are depreciated using the straight-line method with useful lives
ranging from 5 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with
useful lives ranging from 3 to 10 years.

Restricted Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in additional amounts. The Bank is also a
member of and owns stock in the Federal Reserve Bank. These stocks are carried at cost, classified as restricted
securities included in other assets, and periodically evaluated for impairment based on ultimate recovery of par
value. Restricted stock totaled $11.7 million at December 31, 2018 and $10.5 million at December 31, 2017. Both
cash and stock dividends are reported as income.

Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key officers. Bank
owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet
date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at
settlement.

Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets
are recorded at fair value.

Goodwill and Other Intangible Assets: Goodwill resulting from a business combination is generally determined as
the excess of the fair value of the consideration transferred over the fair value of the net assets acquired as of the
acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful
life is not amortized, but tested for impairment at least annually. The Company has selected September 30 as the
date to perform the annual goodwill impairment tests associated with the acquisition of the Farmers Trust, NAI, First
National Bank of Orrville, 1st National Community Bank, Bowers and Monitor. Intangible assets with definite
useful lives are amortized over their estimated useful lives. Goodwill is the only intangible asset with an indefinite
life on the balance sheet. Core deposit intangible assets arising from bank acquisitions are amortized over their
estimated useful lives of 7 to 8 years. Non-compete contracts are amortized on a straight line basis, over the term of
the agreements. Customer relationship and trade name intangibles are amortized over a range of 13 to 15 years on
an accelerated method.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing
needs. The face amount for these items represents the exposure to loss, before considering customer collateral or
ability to repay. Such financial instruments are recorded when they are funded.

Stock-Based Compensation: Compensation cost is recognized for restricted stock awards issued to employees,
based on the fair value of these awards at the date of grant. The market price of the Company’s common stock at
the grant date is used for restricted stock awards. Compensation cost is recognized over the required service period,
generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the entire award.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in
deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching and discretionary
contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of
service.

Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per common share include the dilutive
effect of additional potential common shares issuable under stock equity awards. Earnings and dividends per share
are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income (loss).
Other comprehensive income (loss) consists of unrealized gains and losses on securities available for sale and
changes in the funded status of the post-retirement health plan, which are recognized as separate components of
equity, net of tax effects.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there are any matters currently that will have a material effect
on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank (“FRB”) was required to meet
regulatory reserve and clearing requirements. The Company had deposits with the FRB of $34.2 million at
December 31, 2018 and $30.0 million at December 31, 2017.

Equity: Treasury stock is carried at cost.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends
paid by the Bank and Farmers Trust to the holding company or by the holding company to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market
information and other assumptions as more fully disclosed in Note 7. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly
affect these estimates.

Operating Segments: Operations are managed and financial performance is primarily aggregated and reported in
three lines of business, the Bank, Farmers Trust and Retirement Consulting segments. The Company discloses
segment information in Note 22.

Reclassification: Some items in the prior year financial statements were reclassified to conform to the current
presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

Adoption of New Accounting Standards and Newly Issued, Not Yet Effective Accounting Standards: During
February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220)
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this
Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax
effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects
and will improve the usefulness of information reported to financial statement users. However, because the
amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the guidance
that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not
affected. The standard takes effect for all entities for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2018. Early adoption of the amendments in this Update is permitted for public
business entities for reporting periods for which financial statements have not yet been issued and for all other
entities for reporting periods for which financial statements have not yet been made available for issuance. The
Company early adopted this ASU and the result was a reclass of $106 thousand from accumulated other
comprehensive income to retained earnings and is reflected in the Consolidated Financial Statements as of
December 31, 2017.

During April of 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic
310-20): Premium Amortization on Purchased Callable Debt Securities. Under current U.S. GAAP, a premium is
typically amortized to the maturity date when a callable debt security is purchased at a premium, even if the holder
is certain the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a
premium, the unamortized premium is recorded as a loss in earnings. The new standard shortens the amortization
period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a
premium or a discount with the economics of the underlying instrument. The standard takes effect for public
business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.
The Company early adopted this ASU effective January 1, 2018 and there was no material impact on its
Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the
new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying
amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and
interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The
Company does not plan on early adoption of this ASU. The adoption of this guidance is not expected to have an
impact on the Company's Consolidated Financial Statements.

In February 2016, FASB issued ASU 2016-02 (Topic 842): Leases. The main objective of ASU 2016-02 is to
provide users with useful, transparent and complete information about leasing transactions. ASU 2016-02 requires
the rights and obligations associated with leasing arrangements be reflected on the balance sheet to increase
transparency and comparability among organizations. Under the updated guidance, lessees will be required to
recognize a right-to-use asset and a liability to make a lease payment and disclose key information about leasing
arrangements. ASU 2016-02 is effective for public companies for interim and annual reporting periods beginning
after December 15, 2018, with early adoption permitted. The Company adopted this ASU on January 1, 2019. As
disclosed in footnote 8, certain leases that the Company has in place require the capitalization of $3.6 million on the
balance sheet as an asset and a related liability in the same amount with no income statement effect at January 1,
2019.

In January 2016, FASB issued ASU 2016-01: Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The main objective of ASU 2016-01 is to enhance the
reporting model for financial instruments to provide users of financial statements with more decision-useful
information. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) require equity
investments (except those accounted for under the equity method of accounting or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplify the
impairment assessment of equity investments without readily determinable fair values by requiring a qualitative

assessment to identify impairment; 3) require public business entities to use the exit price notion when measuring
the fair value of financial instruments for disclosure purposes; and 4) require an entity to present separately in other
comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. The
amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Company adopted this ASU 2016-01 on January 1, 2018 which resulted in a
$169 thousand increase to beginning retained earnings and a $169 thousand decrease to accumulated other
comprehensive income on the Consolidated Financial Statements.

In May 2014, FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606). The ASU creates a
new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with
customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core
principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative
information regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within
those annual periods, beginning after December 15, 2017. The new guidance was adopted as of January 1, 2018.
Refer to the Revenue from Contracts with Customers – Note 5 for further discussion on the Company’s accounting
for revenue sources within the scope of Accounting Standards Codification (“ASC”) 606.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13: Financial Instruments-
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an
organization to measure all expected credit losses for financial assets held at the reporting date based on historical
experience, current conditions and reasonable and supportable forecasts. Financial institutions and other
organizations will now use forward-looking information to better inform their credit loss estimates. Many of the
loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change
to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which
loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for
credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU
2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim
periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to
retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company
continues to accumulate historical credit information, has established an internal committee and has completed the
set-up stage of the installation process of new software in preparation of parallel testing in the first quarter of 2019.
Adoption of ASU 2016-13 will happen on January 1, 2020. Management has not determined the full impact the new
standard will have on the Consolidated Financial Statements.

NOTE 2 – BUSINESS COMBINATIONS

During August of 2017, the Company completed the acquisition of Monitor, the holding company of Monitor Bank.
The transaction involved both cash and 465,787 shares of stock totaling $7.5 million. Pursuant to the terms of the
merger agreement, common shareholders of Monitor were entitled to elect to receive consideration in cash or in
common shares, without par value, of the Company, subject to an overall limitation of 85% of the Monitor common
shares being exchanged for the Company’s common shares and 15% exchanged for cash. The per share cash
consideration of $769.38 was equal to Monitor’s March 31 tangible book value multiplied by 1.25. Based on the
volume weighted average closing price of the Company’s common shares for the 20 trading days ended August 11,
2017 of $14.04, the final stock exchange ratio was 54.80, resulting in an implied value per Monitor common share
of $769.38.

Goodwill of $1.0 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of
synergies and the cost savings resulting from the combining of the companies. The goodwill was determined not to
be deductible for income tax purposes. The fair value of other intangible assets of $673 thousand is related to core
deposits.

The following table summarizes the consideration paid for Monitor and the amounts of the assets acquired and
liabilities assumed on the closing date of the acquisition.

Consideration

Cash ........................................................................................................................................ $
Stock .......................................................................................................................................
Fair value of total consideration transferred ................................................................................ $
Fair value of assets acquired

Cash and due from financial institutions ................................................................................ $
Securities available for sale ....................................................................................................
Loans, net ...............................................................................................................................
Premises and equipment .........................................................................................................
Core deposit intangible...........................................................................................................
Other assets.............................................................................................................................
Total assets acquired............................................................................................................

Fair value of liabilities assumed

Deposits ..................................................................................................................................
Accrued interest payable and other liabilities ........................................................................
Total liabilities .....................................................................................................................
Net assets acquired .............................................................................................................. $

Goodwill created ....................................................................................................................

Total net assets acquired...................................................................................................... $

1,154
6,358
7,512

17,673
3,057
19,315
192
673
272
41,182

34,586
121
34,707
6,475
1,037
7,512

During June of 2016, the Bank completed the acquisition of Bowers, and merged all activity of Bowers with
Farmers Insurance, the Bank’s wholly-owned insurance agency subsidiary. The Bowers group is engaged in selling
insurance, including commercial, farm, home, and auto property/casualty insurance and will help to meet the needs
of all the Company’s customers. The transaction involved both cash and 123,280 shares of stock totaling $3.2
million, including up to $1.2 million of future payments, contingent upon Bowers meeting performance targets, with
an estimated fair value at the acquisition date of $880 thousand. The first of three contingent payments were made
during July 2017, totaling $316 thousand, which reduced the earnout payable to $564 thousand. Subsequent to the
first payment, management conducted two annual valuations of the contingent consideration and found it necessary
to reduce the future payment liability associated with the remaining two payments down to $200 thousand at year
end 2017 and $20 thousand at year end 2018. The $364 thousand and $180 thousand were recorded as a reduction
to acquisition related costs on the Consolidated Statements of Income as of December 31, 2017 and 2018,
respectively. The Company conducts this valuation work annually. The earnout calculation for the second of three
contingent payments was completed during June of 2018 and determined that no payment was earned or due. The
acquisition is part of the Company’s plan to increase the levels of noninterest income and to complement the
existing insurance services currently being offered.

Goodwill of $1.8 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of
synergies and the cost savings resulting from the combining of the companies. The goodwill was determined not to
be deductible for income tax purposes. The original fair value of other intangible assets of $1.6 million was related
to client relationships, company name and noncompetition agreements.

The following table summarizes the consideration paid for Bowers and the amounts of the assets acquired and
liabilities assumed on the closing date of the acquisition.

Consideration

Cash ........................................................................................................................................ $
Stock .......................................................................................................................................
Contingent consideration........................................................................................................
Fair value of total consideration transferred ................................................................................ $
Fair value of assets acquired

Cash ........................................................................................................................................ $
Premises and equipment .........................................................................................................
Other assets.............................................................................................................................
Total assets...........................................................................................................................
Fair value of liabilities assumed ..................................................................................................

Net assets acquired .............................................................................................................. $

Assets and liabilities arising from acquisition

Identified intangible assets .....................................................................................................
Deferred tax liability ..............................................................................................................
Goodwill created ....................................................................................................................

Total net assets acquired...................................................................................................... $

1,137
1,138
880
3,155

64
290
34
388
124
264

1,630
(588)
1,849
3,155

The following table presents pro forma information as if the above acquisitions that occurred during 2016 and 2017
actually took place at the beginning of 2016. The pro forma information includes adjustments for merger related
costs, amortization of intangibles arising from the transaction and the related income tax effects. The pro forma
financial information is not necessarily indicative of the results of operations that would have occurred had the
transactions been effective on the assumed date.

Net interest income........................................................................................ $

2017
74,409 $

2016
69,341

Net income..................................................................................................... $

22,776 $

20,661

Basic and diluted earnings per share ............................................................. $

0.83 $

0.77

NOTE 3 – SECURITIES AVAILABLE FOR SALE

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at
December 31, 2018 and 2017 and the corresponding amounts of gross unrealized gains and losses recognized in
accumulated other comprehensive income (loss) were as follows:

2018

Gross
Amortized Unrealized Unrealized
Gains

Losses

Gross

Cost

Fair Value

U.S. Treasury and U.S. government sponsored
entities ....................................................................... $
State and political subdivisions....................................
Corporate bonds ...........................................................
Mortgage-backed securities - residential .....................
Collateralized mortgage obligations ............................
Small Business Administration....................................
Totals ....................................................................... $

6,111 $
211,762
1,206
154,130
21,775
12,292
407,276 $

0 $
2,075
0
84
72
0
2,231 $

(102) $
(1,893)
(18)
(4,167)
(775)
(362)
(7,317) $

6,009
211,944
1,188
150,047
21,072
11,930
402,190

2017

Gross
Amortized Unrealized Unrealized
Gains

Losses

Gross

Cost

Fair Value

8,986 $
188,032
1,238
161,635
17,898
14,608
392,397 $

0 $
3,614
4
419
0
0
4,037 $

(69) $
(643)
(8)
(1,604)
(777)
(396)
(3,497) $

8,917
191,003
1,234
160,450
17,121
14,212
392,937

The proceeds from sales of available-for-sale securities and the associated gains and losses were as follows:

Proceeds ................................................................................................ $
Gross gains ............................................................................................
Gross losses ...........................................................................................

2018
16,162 $
408
(125)

2017
54,497 $
727
(723)

2016
11,493
389
(316)

The tax provision related to these net realized gains was $59 thousand, $2 thousand and $26 thousand respectively.

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected
maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or
without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

Available for sale

Maturity

Within one year ............................................................................................................ $
One to five years...........................................................................................................
Five to ten years ...........................................................................................................
Beyond ten years ..........................................................................................................
Mortgage-backed securities, collateralized mortgage obligations and
Small Business Administration .................................................................................
Totals........................................................................................................................ $

December 31, 2018

Amortized
Cost

Fair Value
5,601
41,682
146,769
25,089

5,611 $
41,647
146,439
25,382

188,197
407,276 $

183,049
402,190

Securities with a carrying amount of $194 million at December 31, 2018 and $269 million at December 31, 2017
were pledged to secure public deposits and repurchase agreements. Farmers Trust had securities, with a carrying
amount of $100 thousand, at year-end 2018 and 2017, pledged to qualify as a fiduciary in the State of Ohio.

In each year, there were no holdings of any other issuer that exceeded 10% of stockholders’ equity, other than the
U.S. Government, its agencies and its sponsored entities.

The following table summarizes the investment securities with unrealized losses at December 31, 2018 and 2017
aggregated by major security type and length of time in a continuous unrealized loss position.

2018

Description of Securities

Less than 12 Months 12 Months or More
Fair
Value

Unrealized Fair

Value

Loss

Unrealized Fair

Value

Total

Unrealized
Loss

(4)

(2) $

5,065 $
(201) 64,174
672
(114) 126,200
(1) 14,003
0 11,919
(322) $222,033 $

(14)

(100) $

5,713 $
(1,692) 87,743
1,188
(4,053) 139,202
(774) 14,023
(362) 11,930
(6,995) $259,799 $

(102)
(1,893)
(18)
(4,167)
(775)
(362)
(7,317)

U.S. Treasury and U.S. government
sponsored entities ....................................... $
648 $
State and political subdivisions .................. 23,569
516
Corporate bonds .........................................
Mortgage-backed securities - residential.... 13,002
20
Collateralized mortgage obligations...........
11
Small Business Administration ..................
Total temporarily impaired .................... $ 37,766 $

2017

Description of Securities

Less than 12 Months 12 Months or More
Fair
Value

Unrealized Fair

Value

Loss

Unrealized Fair

Value

Total

Unrealized
Loss

U.S. Treasury and U.S. government
sponsored entities ....................................... $ 3,970 $
State and political subdivisions .................. 33,188
Corporate bonds .........................................
397
Mortgage-backed securities - residential.... 40,072
1,701
Collateralized mortgage obligations...........
0
Small Business Administration ..................
Total temporarily impaired .................... $ 79,328 $

(3)

(34) $

1,912 $
(220) 25,721
383
(400) 53,760
(22) 15,420
0 14,182
(679) $111,378 $

(5)

(35) $
5,882 $
(423) 58,909
780
(1,204) 93,832
(755) 17,121
(396) 14,182
(2,818) $190,706 $

(69)
(643)
(8)
(1,604)
(777)
(396)
(3,497)

The Company’s equity securities include local and regional bank holdings. No other-than-temporary impairments
were recognized during 2017 or 2016. If an other-than-temporary impairment were to occur, the amount of the
impairment recognized in earnings depends on whether an entity intends to sell the security or it is more likely than
not it would be required to sell the security before recovery of its amortized cost basis. The previous amortized cost
basis less the impairment recognized in earnings becomes the new amortized cost basis of the investment.

As of December 31, 2018, the Company’s security portfolio consisted of 583 securities, 256 of which were in an
unrealized loss position. The majority of unrealized losses are related to the Company’s holdings in securities
issued by state and political subdivisions, mortgage-backed securities - residential, collateralized mortgage
obligations and Small Business Administration, as discussed below:

Securities issued by State and Political subdivisions

Unrealized losses on debt securities issued by state and political subdivisions have not been recognized into income.
At December 31, 2018 and 2017 all securities issued by state and political subdivisions have investment grade
ratings and management does not have the intent and does not expect to be required to sell these securities before
their anticipated recovery. The fair value is expected to recover as the securities approach their maturity date.

Mortgage-backed securities - residential

All of the Company’s holdings of mortgage-backed securities—residential at year end 2018 and 2017 were issued
by U.S. Government sponsored enterprises. Unrealized losses on mortgage-backed securities—residential have not
been recognized into income. Because the decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company does not have the intent to sell these mortgage-backed securities—
residential and it is likely that it will not be required to sell the securities before their anticipated recovery, the
Company does not consider these securities to be other-than-temporarily impaired at December 31, 2018 and 2017.

Collateralized mortgage obligations

The Company’s portfolio includes collateralized mortgage obligations issued by U.S. Government sponsored
enterprises. The decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality.
The Company does not have the intent to sell these collateralized mortgage obligations and it is likely that it will not
be required to sell the securities before their anticipated recovery. The Company monitors all securities to ensure
adequate credit support and as of December 31, 2018 and 2017, the Company believes there is no other-than-
temporary impairment.

Small Business Administration

The Company’s holdings of Small Business Administration securities are issued and backed by the full faith and
credit of the U.S. Government. Unrealized losses on these Small Business Administration securities have not been
recognized into income. The Company does not consider these securities to be other-than-temporarily impaired at
December 31, 2018 and 2017 because the decline in fair value is attributable to changes in interest rates and
illiquidity, and not credit quality, and the Company does not have the intent to sell these securities and it is likely
that it will not be required to sell the securities before their anticipated recovery.

NOTE 4 – LOANS

Loans at year end were as follows:

Originated loans:
Commercial real estate

2018

2017

Owner occupied ................................................................................................... $
Non-owner occupied ............................................................................................
Farmland ..............................................................................................................
Other.....................................................................................................................

158,947
256,124
110,881
94,527

Commercial

Commercial and industrial ...................................................................................
Agricultural ..........................................................................................................

Residential real estate

1-4 family residential ...........................................................................................
Home equity lines of credit..................................................................................

227,031
37,623

307,794
82,690

Consumer

Indirect .................................................................................................................
Direct....................................................................................................................
Other.....................................................................................................................
Total originated loans .................................................................................. $

164,509
30,277
11,894
1,482,297

Acquired loans:
Commercial real estate

Commercial

Residential real estate

44,872
16,920
40,983
8,091

18,141
9,526

78,786
23,617

Consumer

140,321
199,080
70,534
89,025

193,347
32,587

272,421
71,507

155,950
28,519
8,876
1,262,167

53,031
20,286
47,754
11,964

27,094
12,206

96,759
28,755

Direct....................................................................................................................
Other.....................................................................................................................
Total acquired loans........................................................................................
Net deferred loan costs ..............................................................................................
Allowance for loan losses..........................................................................................
Net loans ................................................................................................... $

9,442
162
250,540
3,003
(13,592)
$

1,722,248

14,378
128
312,355
2,859
(12,315)
1,565,066

Purchased credit impaired loans

As part of the NBOH acquisition in 2015 the Company acquired various loans that displayed evidence of
deterioration of credit quality since origination and which was probable that all contractually required payments
would not be collected. The carrying amounts and contractually required payments of these loans which are
included in the loan balances above are summarized in the following tables:

Commercial real estate

Commercial

Commercial and industrial ...................................................................................
Total outstanding balance............................................................................... $
Carrying amount, net of allowance of $0 in 2018 and 2017..................... $

Accretable yield, or income expected to be collected, is shown in the table below:

Beginning balance ................................................................................................... $
New loans purchased .........................................................................................
Accretion of income...........................................................................................
Ending balance ........................................................................................................ $

2018

2017

0
292

899
1,191
903

$
$

2018
170 $
0
(77)
93 $

670
387

1,072
2,129
1,733

2017
247
0
(77)
170

The key assumptions considered include probability of default and the amount of actual prepayments after the
acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income
and principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are
adjusted as necessary. There were no adjustments to forecasted cash flows that impacted the allowance for loan
losses for the years ended December 31, 2018 and 2017.

The following tables present the activity in the allowance for loan losses by portfolio segment for years ended
December 31, 2018, 2017 and 2016:

December 31, 2018
Allowance for loan losses

Commercial
Real Estate Commercial

Residential
Real Estate Consumer Unallocated Total

Beginning balance ............................... $
Provision for loan losses......................
Loans charged off ................................
Recoveries ...........................................
Total ending allowance balance ................ $

4,260 $
650
0
126
5,036 $

2,011 $
112
(220)
190
2,093 $

2,521 $
486
(318)
148
2,837 $

2,848 $
1,764
(2,318)
669
2,963 $

675 $12,315
(12) 3,000
0 (2,856)
0 1,133
663 $13,592

December 31, 2017
Allowance for loan losses

Commercial
Real Estate Commercial

Residential
Real Estate Consumer Unallocated Total

3,577 $
298
(207)
592
4,260 $

1,874 $
446
(375)
66
2,011 $

2,205 $
378
(162)
100
2,521 $

2,766 $
1,983
(2,542)
641
2,848 $

430 $10,852
245 3,350
0 (3,286)
0 1,399
675 $12,315

December 31, 2016
Allowance for loan losses

Commercial
Real Estate Commercial

Residential
Real Estate Consumer Unallocated Total

Beginning balance .............................. $
Provision for loan losses.....................
Loans charged off ...............................
Recoveries ..........................................
Total ending allowance balance............... $

3,127 $
784
(349)
15
3,577 $

1,373 $
701
(245)
45
1,874 $

1,845 $
436
(188)
112
2,205 $

2,160 $
1,992
(2,019)
633
2,766 $

473 $ 8,978
(43) 3,870
0 (2,801)
805
0
430 $10,852

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by
portfolio segment, based on impairment method as of December 31, 2018 and 2017. The recorded investment in
loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued
interest receivable which is not considered to be material:

December 31, 2018
Allowance for loan losses:
Ending allowance balance attributable to
loans:

Commercial
Real Estate Commercial

Residential
Real Estate Consumer Unallocated Total

Individually evaluated for impairment.... $
Collectively evaluated for impairment....
Acquired loans collectively evaluated
for impairment...................................
Acquired with deteriorated credit
quality................................................
Total ending allowance balance ................ $

Loans:

Loans individually evaluated for
impairment ........................................
Loans collectively evaluated for
impairment ........................................
Acquired loans .....................................
Acquired with deteriorated credit
quality................................................
Total ending loans balance ........................ $

6 $
4,981

3 $
2,075

267 $
2,534

0 $
2,960

0 $
663

276
13,213

103

0
5,036 $

0
2,093 $

0
2,837 $

0
2,963 $

0
663 $

0
13,592

790 $

223 $

4,627 $

83 $

0 $

5,723

0 1,480,769
248,445
0

0
903
0 $1,735,840

618,729
110,143

264,208
26,916

385,702 212,130
9,582
101,804

641

0
291,988 $ 492,133 $ 221,795 $

262
729,924 $

December 31, 2017
Allowance for loan losses:
Ending allowance balance attributable to
loans:

Commercial
Real Estate Commercial

Residential
Real Estate Consumer Unallocated Total

0 $
4,214

4 $
1,993

158 $
2,322

0 $
2,844

0 $
675

162
12,048

105

0
4,260 $

0
2,011 $

0
2,521 $

0
2,848 $

0
675 $

0
12,315

658 $

260 $

4,559 $

59 $

0 $

5,536

0 1,259,993
310,118
0

1,734
0
0 $1,577,381

497,168
131,926

225,312
38,503

339,143 198,370
14,507
125,182

786

0
264,861 $ 468,884 $ 212,936 $

948
630,700 $

The following tables present information related to impaired loans by class of loans as of and for years ended
December 31, 2018 and 2017. The recorded investment in loans excludes accrued interest receivable due to
immateriality.

December 31, 2018
With no related allowance recorded:

Commercial real estate

Unpaid Principal
Balance

Recorded
Investment

Allowance for
Loan Losses
Allocated

Owner occupied............................................................... $
Non-owner occupied .......................................................
Farmland..........................................................................

Commercial

Commercial and industrial .................................................
Agricultural ........................................................................

Residential real estate

1-4 family residential.......................................................
Home equity lines of credit .............................................
Consumer ..............................................................................
Subtotal .................................................................................

With an allowance recorded:
Commercial real estate

Owner occupied...............................................................
Non-owner occupied .......................................................
Farmland..........................................................................

Commercial

Commercial and industrial ..............................................
Agricultural .....................................................................

Residential real estate

524
40
0

191
0

3,451
379
174
4,759

0
0
258

61
0

494
38
0

162
0

2,759
326
83
3,862

0
0
258

61
0

0
0
0

0
0

0
0
0
0

0
0
6

3
0

1,354
224
0
1,897
6,656

1,343
199
0
1,861
5,723

188
79
0
276
276

December 31, 2017
With no related allowance recorded:

Commercial real estate

Unpaid Principal
Balance

Recorded
Investment

Allowance for
Loan Losses
Allocated

Commercial

Commercial and industrial ..............................................
Agricultural .....................................................................

Residential real estate

With an allowance recorded:
Commercial real estate

Commercial

Commercial and industrial ..............................................
Agricultural .....................................................................

Residential real estate

659
0
0

214
0

2,923
341
145
4,282

0
0
0

68
0

658
0
0

192
0

2,697
319
59
3,925

0
0
0

68
0

0
0
0

0
0

0
0
0
0

0
0
0

4
0

1,409
159
0
1,636
5,918

1,387
156
0
1,611
5,536

84
74
0
162
162

The Following tables present the average recorded investment in impaired loans by class and interest income
recognized by loan class for the years ended December 31, 2018, 2017 and 2016.

December 31, 2018

With no related allowance recorded:

Commercial real estate

Average Recorded
Investment

Interest Income
Recognized

Owner occupied ................................................................................. $
Non-owner occupied..........................................................................
Farmland ............................................................................................

Commercial

Commercial and industrial ...................................................................
Agricultural...........................................................................................

Residential real estate

1-4 family residential .........................................................................
Home equity lines of credit................................................................
Consumer ................................................................................................
Subtotal ...................................................................................................

With an allowance recorded:
Commercial real estate

Owner occupied .................................................................................
Non-owner occupied..........................................................................
Farmland ............................................................................................

Commercial

Commercial and industrial.................................................................
Agricultural........................................................................................

Residential real estate

490 $
26
0

335
0

2,769
309
72
4,001

0
0
193

68
0

1,778
166
3
2,208
6,209 $

30
2
0

6
0

186
16
11
251

0
0
0

4
0

47
7
0
58
309

December 31, 2017

With no related allowance recorded:

Commercial real estate

Average Recorded
Investment

Interest Income
Recognized

Commercial

Commercial and industrial.................................................................
Agricultural........................................................................................

Residential real estate

With an allowance recorded:
Commercial real estate

Commercial

Commercial and industrial.................................................................
Agricultural........................................................................................

Residential real estate

767 $
68
12

184
10

2,343
299
74
3,757

134
640
63

71
50

837
95
2
1,892
5,649 $

10
2
0

4
0

138
15
11
180

6
28
0

4
0

29
3
0
70
250

December 31, 2016
With no related allowance recorded:

Commercial real estate

Average Recorded
Investment

Interest Income
Recognized

Commercial

Commercial and industrial.................................................................
Agricultural

Residential real estate

With an allowance recorded:
Commercial real estate

Commercial

Commercial and industrial.................................................................
Agricultural........................................................................................

Residential real estate

1,601 $
334
0

641

2,302
221
97
5,196

874
1,283
127

103
73

828
85
1
3,374
8,570 $

70
5
0

145
10
13
258

29
67
0

4
0

36
4
0
140
398

Cash basis interest income recognized and interest income recognized was materially equal for 2018, 2017 and 2016.

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that
are collectively evaluated for impairment and individually classified impaired loans. The following table presents
the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of
December 31, 2018 and 2017:

2018

2017

Loans Past Due
90 Days or More
Still Accruing

Nonaccrual

Loans Past Due
90 Days or More
Still Accruing

Nonaccrual

Originated loans:
Commercial real estate

Owner occupied...................................................... $
Non-owner occupied ..............................................
Farmland.................................................................

Commercial

Commercial and industrial .....................................
Agricultural ............................................................

Residential real estate

340 $
0
30

122
158

1-4 family residential..............................................
Home equity lines of credit ....................................

2,318
644

Consumer

Indirect....................................................................
Direct ......................................................................
Other .......................................................................
Total originated loans ....................................... $

346
54
0
4,012 $

Acquired loans:
Commercial real estate

Owner occupied...................................................... $
Non-owner occupied ..............................................
Other .......................................................................
Farmland.................................................................

Commercial

Commercial and industrial .....................................
Agricultural ............................................................

Residential real estate

0 $
82
0
257

824
291

1-4 family residential..............................................
Home equity lines of credit ....................................

1,001
203

Consumer

Direct ......................................................................
Total acquired loans .......................................... $
Total loans ................................................... $

95
2,753 $
6,765 $

0 $
0
0

0
0

185
31

369
200
2
787 $

0 $
0
0
0

0
0

122
14

43
179 $
966 $

501 $
0
45

249
2

2,653
602

457
63
0
4,572 $

0 $
216
0
0

943
9

613
170

140
2,091 $
6,663 $

0
0
0

0
0

393
8

361
153
14
929

0
0
0
0

19
0

69
0

15
103
1,032

The following tables present the aging of the recorded investment in past due loans as of December 31, 2018 and
2017 by class of loans:

December 31, 2018
Originated loans:
Commercial real estate

30-59
Days
Past
Due

60-89
Days
Past
Due

90 Days or More
Past Due
and Nonaccrual

Total
Past
Due

Loans Not
Past Due Total

Owner occupied.................................... $
Non-owner occupied ............................
Farmland...............................................
Other .....................................................

Commercial

Commercial and industrial ...................
Agricultural ..........................................

Residential real estate

82 $
22
184
0

159
69

1-4 family residential............................
Home equity lines of credit ..................

1,964
64

0 $
0
0
0

0
10

424
14

Consumer

340 $
0
30
0

122
158

422 $ 158,161 $ 158,583
255,480
22
110,761
214
94,242
0

255,458
110,547
94,242

281
237

226,320
37,484

226,601
37,721

2,503
675

4,891
753

302,131
81,957

307,022
82,710

Indirect..................................................
Direct ....................................................
Other .....................................................

755
340
14
Total originated loans: .................... $ 5,005 $ 1,557 $

1,714
714
33

715
254
2

169,806
30,491
11,894
4,799 $ 11,361 $1,473,950 $1,485,311

166,622
29,183
11,845

3,184
1,308
49

Acquired loans:
Commercial real estate

Commercial

Commercial and industrial ...................
Agricultural ..........................................

Residential real estate

1-4 family residential............................
Home equity lines of credit ..................

Consumer

321 $
0
0
0

94
31

750
208

0 $
0
102
0

0
5

229
0

0 $
82
257
0

824
291

321 $
82
359
0

44,618 $
16,764
40,623
8,091

44,939
16,846
40,982
8,091

918
327

17,223
9,198

18,141
9,525

1,123
217

2,102
425

76,682
23,192

78,784
23,617

713
0

138
0

9,442
162
2,932 $ 5,247 $ 245,282 $ 250,529
7,731 $ 16,608 $1,719,232 $1,735,840

8,729
162

Direct ....................................................
Other .....................................................

318
0
Total acquired loans ........................ $ 1,722 $

257
0
593 $
Total loans ................................. $ 6,727 $ 2,150 $

December 31, 2017
Originated loans:
Commercial real estate

30-59
Days
Past
Due

60-89
Days
Past
Due

90 Days or More
Past Due
and Nonaccrual

Total
Past
Due

Loans Not
Past Due Total

4 $
0
0
0

Commercial

Commercial and industrial ...................
Agricultural ..........................................

292
74

Residential real estate

340 $
0
0
0

3
0

501 $
0
45
0

249
2

845 $ 139,081 $ 139,926
198,588
70,443
88,703

198,588
70,398
88,703

0
45
0

544
76

192,335
32,605

192,879
32,681

1-4 family residential............................
Home equity lines of credit ..................

2,044
155

403
18

3,046
610

5,493
783

266,338
70,754

271,831
71,537

Consumer

Indirect..................................................
Direct ....................................................
Other .....................................................

829
250
11
Total originated loans: .................... $ 5,745 $ 1,854 $

2,429
632
115

818
216
14

160,848
28,706
8,876
5,501 $ 13,100 $1,251,918 $1,265,018

156,772
27,608
8,736

4,076
1,098
140

Acquired loans:
Commercial real estate

Owner occupied....................................
Non-owner occupied ............................
Farmland...............................................
Other .....................................................

Commercial

Commercial and industrial ...................
Agricultural ..........................................

Residential real estate

1-4 family residential............................
Home equity lines of credit ..................

Consumer

0
0
454
0

327
87

858
161

0
0
0
0

96
0

77
0

0
216
0
0

0
216
454
0

53,051
20,042
47,301
11,976

53,051
20,258
47,755
11,976

962
9

1,385
96

25,709
12,111

27,094
12,207

682
170

1,617
331

95,144
28,424

96,761
28,755

Direct ....................................................
Other .....................................................

380
0
Total acquired loans ........................ $ 2,267 $

151
1
325 $
Total loans ................................. $ 8,012 $ 2,179 $

155
0

686
1

14,378
128
2,194 $ 4,786 $ 307,577 $ 312,363
7,695 $ 17,886 $1,559,495 $1,577,381

13,692
127

Troubled Debt Restructurings:

Total troubled debt restructurings were $5.5 million and $5.0 million at December 31, 2018 and 2017 respectively.
The Company has allocated $72 thousand and $68 thousand of specific reserves to customers whose loan terms have
been modified in troubled debt restructurings as of December 31, 2018 and 2017, respectively. There were no
commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings
at December 31, 2018 and 2017.

During the years ending December 31, 2018, 2017 and 2016, the terms of certain loans were modified as troubled
debt restructurings. The modification of the terms of such loans included one or a combination of the following: a
reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower
than the current market rate for new debt with similar risk; a permanent increase of the recorded investment in the
loan due to a protective advance to pay delinquent real estate taxes or advance new monies; an extension of an
interest only period; a deferral of principal payments; a capitalization of interest or a legal concession.

Troubled debt restructuring modifications involved a reduction of the notes stated interest rate in the range of 0.49%
to 3.49%. There were also extensions of the maturity dates on these and other troubled debt restructurings in the
range of five months to 132 months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the years
ending December 31, 2018, 2017 and 2016:

Number of

Pre-
Modification
Outstanding
Recorded
Investment

Post-
Modification
Outstanding
Recorded
Investment

360

Loans

7
6
23
2
40

1
1

7
1
2
19
59

$
$

360

348
91
118
19
955

42
258

115

348
91
118
19
955

42
258

115

321
32
24
792
1,747

$
$

337
32
24
808
1,763

December 31, 2018
Troubled Debt Restructurings:
Originated loans:

Commercial real estate

Owner occupied......................................................................

Commercial

Commercial and industrial......................................................

Residential real estate

1-4 family residential..............................................................
Home equity lines of credit ....................................................
Indirect .........................................................................................
Consumer .....................................................................................
Total originated loans........................................................

Acquired loans:

Commercial real estate

Non-owner occupied...............................................................
Farmland.................................................................................

Commercial

Commercial and industrial......................................................

Residential real estate

1-4 family residential..............................................................
Home equity lines of credit ....................................................
Consumer .....................................................................................
Total acquired loans ..........................................................
Total loans ...................................................................

The troubled debt restructurings described above did not increase the allowance for loan losses or result in any
charge offs during the year ended December 31, 2018.

December 31, 2017

Troubled Debt Restructurings:
Originated loans:

Residential real estate

1-4 family residential..............................................................
Home equity lines of credit ....................................................
Indirect .........................................................................................
Total originated loans........................................................

Acquired loans:
Commercial

Commercial and industrial......................................................

Residential real estate

1-4 family residential..............................................................
Home equity lines of credit ....................................................
Consumer .....................................................................................
Total acquired loans ..........................................................
Total loans ...................................................................

Number of

Pre-
Modification
Outstanding
Recorded
Investment

Post-
Modification
Outstanding
Recorded
Investment

$
$

910
234
161
1,305

85
57
55
210
1,515

$
$

917
234
161
1,312

85
57
55
210
1,522

The troubled debt restructurings described above increased the allowance for loan losses by $75 thousand and
resulted in charge offs of $75 thousand during the year ended December 31, 2017.

December 31, 2016

Troubled Debt Restructurings:
Originated loans:

Residential real estate

Acquired loans:

Residential real estate

1-4 family residential..............................................................
Home equity lines of credit ....................................................
Consumer .....................................................................................
Total acquired loans ..........................................................
Total loans ...................................................................

Number of

Pre-
Modification
Outstanding
Recorded
Investment

Post-
Modification
Outstanding
Recorded
Investment

$
$

436
40
182
12
670

153
18
40
211
881

$
$

437
40
182
12
671

153
18
40
211
882

The troubled debt restructurings described above increased the allowance for loan losses by $43 thousand and
resulted in charge offs of $344 thousand during the year ended December 31, 2016.

Loans

15
10
29
54

3
1
2
7
61

Loans

15
1
26
2
44

4
1
2
7
51

There were two residential real estate loans for $146 thousand for which there were payment defaults within twelve
months following the modification of the troubled debt restructuring during the year ended December 31, 2018.
Both loans were past due at December 31, 2018. There was no effect on the provision for loan losses as a result of
this default during 2018. A loan is considered to be in payment default once it is 30 days contractually past due
under the modified terms.

There were no loans for which there were payment defaults within twelve months following the modification of the
troubled debt restructuring during the year ended December 31, 2017.

There were two commercial real estate loans for $1.2 million, one residential real estate loan for $1 thousand and
one home equity line of credit for $10 thousand modified as troubled debt restructurings for which there were
payment defaults within twelve months following the modification during the year ended December 31, 2016. None
of the loans were past due at December 31, 2016. There was no effect of the provision for loan losses as a result of
this default during 2016.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt such as: current financial information, historical payment experience, credit documentation, public
information and current economic trends, among other factors. The Company establishes a risk rating at origination
for all commercial loan and commercial real estate relationships. For relationships over $750 thousand management
monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt. Management
also affirms the risk ratings for the loans and leases in their respective portfolios on an annual basis. The Company
uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s
close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment
prospects for the loan or of the institution’s credit position at some future date. Special mention assets are not
adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility
that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard,
with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are
considered to be pass rated loans.

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

December 31, 2018
Originated loans:
Commercial real estate

Pass

Special
Mention

Sub

standard

Total

Owner occupied....................................................... $
Non-owner occupied................................................
Farmland..................................................................
Other ........................................................................

156,892
251,240
109,391
92,669

Commercial

Commercial and industrial.......................................
Agricultural..............................................................
Total originated loans......................................... $

219,938
37,158
867,288

Acquired loans:
Commercial real estate

43,763
16,601
36,565
7,434

Commercial

Commercial and industrial.......................................
Agricultural..............................................................
Total acquired loans ........................................... $
Total loans .................................................... $

16,407
8,612
129,382
996,670

December 31, 2017
Originated loans:
Commercial real estate

Pass

137,913
198,043
70,354
88,421

Commercial

184,444
32,291
711,466

Acquired loans:
Commercial real estate

51,133
19,823
43,694
11,299

Commercial

25,286
11,200
162,435
873,901

$
$

945
4,139
1,301
1,325

4,207
81
11,998

430
58
668
0

170
346
1,672
13,670

Special
Mention

442
419
44
36

5,326
192
6,459

466
63
3,304
567

2
554
4,956
11,415

$
$

746
101
69
248

2,456
482
4,102

746
187
3,749
657

158,583
255,480
110,761
94,242

226,601
37,721
883,388

44,939
16,846
40,982
8,091

1,564
567
7,470
11,572

18,141
9,525
$
138,524
$ 1,021,912

Sub

standard

Total

1,571
126
45
246

3,109
198
5,295

1,452
372
757
110

1,806
453
4,950
10,245

$
$

139,926
198,588
70,443
88,703

192,879
32,681
723,220

53,051
20,258
47,755
11,976

27,094
12,207
172,341
895,561

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For
residential, consumer and indirect loan classes, the Company also evaluates credit quality based on the aging status
of the loan, which was previously presented, and by payment activity.

The following table presents the recorded investment in residential, consumer and indirect auto loans based on
payment activity. Nonperforming loans are loans past due 90 days and still accruing interest and nonaccrual loans.

Residential Real Estate

Consumer

December 31, 2018
Originated loans:

1-4 Family
Residential

Home Equity Lines
of Credit

Indirect

Direct

Other

Performing.................................................... $ 304,519 $
2,503
Nonperforming .............................................
Total originated loans ............................. $ 307,022 $

82,035 $ 169,091 $ 30,237 $
254
715
82,710 $ 169,806 $ 30,491 $

675

11,892
2
11,894

Acquired loans:

Performing....................................................
Nonperforming .............................................
Total acquired loans ................................ $

77,661
1,123
78,784 $
Total loans ......................................... $ 385,806 $

23,400
217
23,617 $

9,304
138
9,442 $
106,327 $ 169,806 $ 39,933 $

0
0
0 $

162
0
162
12,056

Residential Real Estate

Consumer

December 31, 2017
Originated loans:

1-4 Family
Residential

Home Equity Lines
of Credit

Indirect

Direct

Other

Performing.................................................... $ 268,785 $
3,046
Nonperforming .............................................
Total originated loans ............................. $ 271,831 $

70,927 $ 160,030 $ 28,490 $
216
818
71,537 $ 160,848 $ 28,706 $

610

Acquired loans:

Performing....................................................
Nonperforming .............................................
Total acquired loans ................................ $

96,079
682
96,761 $
Total loans ......................................... $ 368,592 $

28,585
170
28,755 $

14,223
0
0
155
0 $ 14,378 $
100,292 $ 160,848 $ 43,084 $

8,862
14
8,876

128
0
128
9,004

NOTE 5 – REVENUE FROM CONTRACTS WITH CUSTOMERS

All material revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest
income. The following table presents the Company’s noninterest income by revenue stream and reportable segment,
net of eliminations, for the years ended December 31, 2018 and 2017. Items outside the scope of ASC 606 are noted
as such. The Company elected the modified retrospective approach of adoption, therefore prior period balances are
presented under legacy GAAP and may not be comparable to the current year presentation.

(In Thousands of Dollars)
December 31, 2018
Service charges on deposit accounts ........................... $
Debit card and EFT fees ..............................................
Trust fees .....................................................................
Insurance agency commissions ...................................
Retirement plan consulting fees ..................................
Investment commissions .............................................
Other ............................................................................
Total noninterest income........................................ $

(In Thousands of Dollars)
December 31, 2017
Service charges on deposit accounts ........................... $
Debit card and EFT fees ..............................................
Trust fees .....................................................................
Insurance agency commissions ...................................
Retirement plan consulting fees ..................................
Investment commissions .............................................
Other ............................................................................
Total noninterest income........................................ $

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Totals

0 $
0
7,126
0
0
0
0
7,126 $

4,254 $
3,351
0
2,621
0
1,103
5,360
16,689 $

0 $
0
0
0
1,684
0
0
1,684 $

4,254
3,351
7,126
2,621
1,684
1,103
5,360
25,499

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Totals

0 $
0
6,431
0
0
0
0
6,431 $

4,077 $
3,089
0
2,407
0
919
5,271
15,763 $

0 $
0
0
0
1,857
0
0
1,857 $

4,077
3,089
6,431
2,407
1,857
919
5,271
24,051

A description of the Company’s revenue streams under ASC 606 follows:

Service charges on deposit accounts – The Company earns fees from its deposit customers for transaction-based,
account maintenance, and overdraft services. Management reviewed the deposit account agreements, and
determined that the agreements can be terminated at any time by either the Bank or the account holder. Transaction
fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied.
The Bank’s monthly service charges and maintenance fees are for services provided to the customer on a monthly
basis are considered a series of services that have the same pattern of transfer each month. The review of service
charges assessed on deposit accounts, included the amount of variable consideration that is a part of the monthly
charges. It was found that the waiver of service charges due to insufficient funds and dormant account fees is
immaterial and would not require a change in the accounting treatment for these fees under the new revenue
standards. Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue
recognition.

Debit Card Interchange Fees – Customers and the Bank have an account agreement and maintain deposit balances
with the Bank. Customers use a bank issued debit card to purchase goods and services, and the Bank earns
interchange fees on those transactions, typically a percentage of the sale amount of the transaction. The Bank
records the amount due when it receives the settlement from the payment network. Payments from the payment
network are received and recorded into income on a daily basis. There are no contingent debit card interchange fees
recorded by the Company that could be subject to a clawback in future periods. Recognition of revenue under ASC
606 did not materially change the timing or magnitude of revenue recognition.

Trust fees – Services provided to Farmers Trust customers are a series of distinct services that have the same pattern
of transfer each month. Fees for trust accounts are billed and drafted from trust accounts monthly. The Company
records these fees on the income statement on a monthly basis. Fees are assessed based on the total investable assets
of the customer’s trust account. A signed contract between the Company and the customer is maintained for all
customer trust accounts with payment terms identified. It is probable that the fees will be collectible as funds being
managed are accessible by the asset manager. Past history of trust fee income recorded by the Company indicates
that it is highly unlikely that a significant reversal could occur. There are no contingent incentive fees recorded by
the Company that could be subject to a clawback in future periods. Recognition of revenue under ASC 606 did not
materially change the timing or magnitude of revenue recognition.

Insurance Agency Commissions – Insurance agency commissions are received from insurance carriers for the
agency’s share of commissions from customer premium payments. These commissions are recorded into income
when checks are received from the insurance carriers, and there is no contingent portion associated with these
commission checks. There may be a short time-lag in recording revenue when cash is received instead of recording
the revenue when the policy is signed by the customer, but the time lag is insignificant and does not impact the
revenue recognition process.

Farmers Insurance also receives incentive checks from the insurance carriers for achieving specified levels of
production with particular carriers. These amounts are recorded into income when a check is received, and there are
no contingent amounts associated with these payments that may be clawed back by the carrier in the future. Similar
to the monthly commissions explained in the preceding paragraph, there may be a short time-lag in recording
incentive revenue on a cash basis as opposed to estimating the amount of incentive revenue expected to be earned,
this does not materially impact the recognition of insurance revenue. If there were any amounts that would need to
be refunded for one specific Farmers Insurance customer, management believes the reversal would not be
significant.

Other potential situations surrounding the recognition of Farmers Insurance revenue include the estimating potential
refunds due to the likely cancellation of a percentage of customers cancelling their policies and recording revenue at
the time of policy renewals. Management concluded that since Farmers Insurance agency commissions represent
only 2.2% of the Company’s total revenue, adjusting the current practice of recording insurance revenue for these
situations would not have a material impact on the reporting of total revenue. Recognition of revenue under ASC
606 did not materially change the timing or magnitude of revenue recognition.

Retirement Plan Consulting Fees – The fees earned from retirement plan consulting are generated by NAI.
Revenue is recognized based on the level of work performed for the client. Any payments that are received for work
to be performed in the future are recorded in a deferred revenue account, and recorded into income when the fees are
earned. Retirement plan consulting fees represent only 1.4% of the Company’s total revenue, and therefore
management has concluded that any adjustment of revenue for one particular customer for a refund or any other
reason would be insignificant and would not materially impact the Company’s total revenue. Recognition of
revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition.

Investment Commissions – Investment commissions are earned through the sales of non-deposit investment
products to customers of the Company. The sales are conducted through a third-party broker-dealer. When the
commissions are received and recorded into income on the Bank’s income statement, there is no contingent portion
that may need to be refunded back to Cetera. Investment commissions represent only 1.0% of the Company’s total
revenue, and therefore management has concluded that any adjustment of revenue for a particular customer for a
refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.
Recognition of revenue under ASC 606 did not materially change the timing or magnitude of revenue recognition.

Other – Income items included in “Other” are Bank owned life insurance income, security gains, net gains on the
sale of loans and other operating income. Any amounts within the scope of ASC 606 are deemed immaterial.

NOTE 6 – LOAN SERVICING

The Company began servicing loans upon the acquisition of First National Bank’s servicing portfolio in June 2015.
Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at year-end are
as follows:

Mortgage loan portfolio serviced for:

FHLMC ................................................................................................. $

226,389

179,253

2018

2017

Custodial escrow balances maintained in connection with serviced loans were $1.7 million at December 31, 2018
and $1.4 million at December 31, 2017.

Mortgage servicing rights is recorded on the balance sheets as other assets. Activity for mortgage servicing rights
for years ended December 31, 2018, 2017 and 2016 are as follows:

Servicing rights:

Beginning balance ................................................................... $
Additions .................................................................................
Amortization to expense..........................................................
Ending balance ........................................................................ $

2018

1,242
627
(401)
1,468

2017

854
701
(313)
1,242

2016

453
611
(210)
854

There was no valuation allowance required for mortgage servicing rights at December 31, 2018, 2017 and 2016.

NOTE 7 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of
financial instrument:

Investment Securities

The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis.
ASU 2016-01, which was adopted by the Company as of January 1, 2018, requires the use of exit price notion when
measuring the fair value of financial instruments for disclosure purposes. The Company’s service provider is
considered a leading evaluation pricing service for U.S. domestic fixed income securities and complies fully with
ASU 2016-01’s exit pricing requirements. They subscribe to multiple third-party pricing vendors, and supplement
that information with matrix pricing methods. The fair values for investment securities, which consist of equity
securities that are recorded at fair market value to comply with ASU 2016-01, are determined by quoted market
prices in active markets, if available (Level 1). The equity securities change in fair market value is recorded in the
income statements. For securities where quoted prices are not available, fair values are calculated based on quoted

prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs
other than quoted prices, which provide a reasonable basis for fair value determination. Such inputs may include
interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates. Inputs used are derived
principally from observable market data (Level 2). For securities where quoted prices or market prices of similar
securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level
3). The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair
value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and
assumptions based on the best information at the time, to the extent that inputs are available without undue cost and
effort. For the years ended December 31, 2018 and 2017 the fair value of Level 3 investment securities was
immaterial.

Derivative Instruments

The fair values of derivative instruments are based on valuation models using observable market data as of the
measurement date (Level 2).

Impaired Loans

At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair
value and non-collateral dependent loans are valued based on discounted cash flows. Impaired loans carried at fair
value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans fair
value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income approach. Adjustments are routinely
made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income
data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs
for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the
borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical
knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge
of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a
quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when
acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. Fair values are commonly based on recent real estate appraisals. These appraisals may
use a single valuation approach or a combination of approaches including comparable sales and the income
approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and
typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified
general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for
residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once
received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as
well as the overall resulting fair value in comparison with independent data sources such as recent market data or
industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has
been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at
fair value.

Assets measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at December 31, 2018 Using:

Quoted Prices
in
Active
Markets for
Identical
Assets
(Level 1)

Carrying
Value

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial Assets

Investment securities available-for sale

U.S. Treasury and U.S. government sponsored
entities......................................................................................... $
State and political subdivisions .....................................................
Corporate bonds.............................................................................
Mortgage-backed securities-residential .........................................
Collateralized mortgage obligations ..............................................
Small Business Administration......................................................

Equity securities

Equity securities at fair value ........................................................
Other equity investments measured at net asset value..................
Total investment securities ..................................................... $

Loan yield maintenance provisions ...................................................... $

6,009 $

211,944
1,188
150,047
21,072
11,930

495
6,635
409,320

767

0 $
0
0
0
0
0

495
n/a
495

6,009 $

211,944
1,188
150,041
21,072
11,930

0
n/a
402,184

767

Financial Liabilities

Interest rate swaps ................................................................................ $

767

0
0
0
6
0
0

0
n/a
6

Fair Value Measurements at December 31, 2017 Using:

Quoted Prices
in
Active
Markets for
Identical
Assets
(Level 1)

Carrying
Value

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Financial Assets

Investment securities available-for sale

Equity securities

Equity securities at fair value ........................................................
Other equity investments measured at net asset value...................
Total investment securities ..................................................... $

Loan yield maintenance provisions ............................................... $

8,917 $

191,003
1,234
160,450
17,121
14,212

394
5,185
398,516

653

0 $
0
0
0
0
0

394
n/a
394

8,917 $

191,003
1,234
160,442
17,121
14,212

0
n/a
392,929

653

Financial Liabilities

Interest rate swaps ................................................................................ $

653

0
0
0
8
0
0

0
n/a
8

There were no significant transfers between Level 1 and Level 2 during 2018 or 2017.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31:

Investment Securities Available-for-sale (Level 3)
2017

2018

2016

Beginning Balance ....................................................................................................... $
Repayments, calls and maturities ..........................................................................
Acquired and/or purchased....................................................................................
Ending Balance............................................................................................................. $

8
(2)
0
6

12
(4)
0
8

15
(3)
0
12

Assets Measured on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements
at December 31, 2018 Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Carrying
Value

Financial Assets

Impaired loans

Commercial real estate

Farmland ................................................................................. $
1–4 family residential .............................................................
Consumer.......................................................................................

251
640
7

0
0
0

251
640
7

Fair Value Measurements
at December 31, 2017 Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Carrying
Value

Financial Assets

Impaired loans

1–4 family residential .................................................................... $
Consumer.......................................................................................

740
2

0
0

740
2

Impaired loans that are measured for impairment using the fair value of the collateral for collateral dependent loans,
had a principal balance of $1.1 million, with a valuation allowance of $227 thousand at December 31, 2018,
resulting in an additional provision for loan losses of $180 thousand for the year ending December 31, 2018. At
December 31, 2017, impaired loans had a principal balance of $851 thousand, with a valuation allowance of $109
thousand. Loans measured at fair value throughout the year resulted in an additional provision for loan losses of
$272 thousand for the year ending December 31, 2017. At December 31, 2016, impaired loans had a principal
balance of $727 thousand, with a valuation allowance of $173 thousand. Loans measured at fair value throughout
the year resulted in an additional provision for loan losses of $139 thousand for the year ending December 31, 2016.
Excluded from the fair value of impaired loans, at December 31, 2018 and 2017, discussed above are $694 thousand
and $763 thousand of loans classified as troubled debt restructurings and measured using the present value of cash
flows, which is not considered an exit price.

Impaired commercial real estate loans, both owner occupied and non-owner occupied are valued by independent
external appraisals. These external appraisals are prepared using the sales comparison approach and income
approach valuation techniques. Management makes subsequent unobservable adjustments to the impaired loan
appraisals. Impaired loans other than commercial real estate and other real estate owned are not considered material.

At December 31, 2018, other real estate owned measured at fair value less costs to sell, had a zero net carrying
amount. During the year ended December 31, 2018 the Company did not have any write-downs related to other real
estate owned. The Company had $23 thousand and $36 thousand related write downs during the years ended
December 31, 2017 and 2016.

The following table presents quantitative information about level 3 fair value measurements for financial
instruments measured at fair value on a non-recurring basis at year ended 2018 and 2017:

December 31, 2018
Impaired loans

Fair value

Valuation
Technique(s)

Unobservable
Input(s)

Range
Weighted Average

Commercial real estate ........... $

251 Sales comparison

Residential ..............................

640 Sales comparison

Consumer................................

7 Sales comparison

Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales

(22.70%) - 16.16%
9.39%

(49.90%) - 45.99%
6.52%

(5.71%) - 5.71%
(0.00%)

December 31, 2017
Impaired loans

Fair value

Valuation
Technique(s)

Unobservable
Input(s)

Range
Weighted Average

Residential ..............................

740 Sales comparison

Consumer................................

2 Sales comparison

Adjustment for
differences
between
comparable sales
Adjustment for
differences
between
comparable sales

(15.76%) - 27.92%
0.53%

(21.98%) - 21.98%
(0.00%)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments measured on a recurring basis and not
previously presented, at December 31, 2018 and December 31, 2017 are as follows:

Fair Value Measurements at December 31, 2018 Using:

Carrying
Amount

Level 1

Level 2

Level 3

Total

Financial assets

57,926 $
Cash and cash equivalents ................................... $
11,737
Restricted stock....................................................
Loans held for sale...............................................
1,237
Loans, net............................................................. 1,722,248
7,114
Accrued interest receivable .................................

Financial liabilities

18,042 $ 39,884 $
n/a
1,274

0 $
57,926
n/a
n/a
1,274
0
0 1,673,626 1,673,626
7,114

4,755

2,359

n/a
0
0
0

Deposits ............................................................... 1,799,720 1,427,260 367,306
0 244,759
Short-term borrowings.........................................
5,847
0
Long-term borrowings.........................................
927
63
Accrued interest payable .....................................

244,759
6,033
990

0 1,794,566
244,759
0
5,847
0
990
0

Fair Value Measurements at December 31, 2017 Using:

Carrying
Amount

Level 1

Level 2

Level 3

Total

Financial assets

57,614 $
Cash and cash equivalents ................................... $
10,491
Restricted stock....................................................
Loans held for sale...............................................
272
Loans, net............................................................. 1,565,066
6,669
Accrued interest receivable .................................

Financial liabilities

17,785 $ 39,829 $
n/a
283

0 $
57,614
n/a
n/a
283
0
0 1,569,381 1,569,381
6,669

4,414

2,255

n/a
0
0
0

Deposits ............................................................... 1,604,719 1,340,814 259,346
0 289,565
Short-term borrowings.........................................
6,690
0
Long-term borrowings.........................................
587
46
Accrued interest payable .....................................

289,565
6,994
633

0 1,600,160
289,565
0
6,690
0
633
0

The methods and assumptions used to estimate fair value, not previously described, are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and
are classified as either Level 1 or Level 2. The Company has determined that cash on hand and non-interest bearing
due from bank accounts are Level 1 whereas interest bearing federal funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its
transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: Beginning January 1, 2018 the
Company used a third party firm that uses cash flow analysis and current market interest rates along with
adjustments for credit, liquidity and option risk to conform to the ASU 2016-01 exit price requirement. At
December 31, 2017, management used the discounted cash flow analysis and interest rates being offered for loans
with similar terms to borrowers of similar credit quality to estimate fair market value. Impaired loans are valued at
the lower of cost or fair value as described previously.

Loans held for sale: The fair value of loans held for sale is estimated based upon the average of binding contracts
and quotes from third party investors resulting in a Level 2 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate
fair value resulting in a Level l, Level 2 or Level 3 classification. The classification is the result of the association
with securities, loans and deposits.

Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings and
money market accounts—are, by definition, equal to the amount payable on demand at the reporting date resulting
in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values
at the reporting date resulting Level 2 classification. Fair value for fixed rate certificates of deposit are estimated
using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements,
and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a
Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash
flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level
2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not considered material.

NOTE 8 – PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

Land .................................................................................................................... $
Buildings.............................................................................................................
Furniture, fixtures and equipment.......................................................................
Leasehold Improvements....................................................................................

Less accumulated depreciation ...........................................................................

NET BOOK VALUE .................................................................................... $

2018
4,775 $
24,800
14,080
482
44,137
(22,926)
21,211 $

2017
4,775
24,692
13,739
482
43,688
(21,402)
22,286

Depreciation expense was $1.5 million for year ended December 31, 2018, $1.6 million for year ended
December 31, 2017 and $1.7 million for year ended December 31, 2016.

The Company leases certain branch properties under operating leases. Rent expense was $490, $449, and $362
thousand for 2018, 2017 and 2016, respectively. In addition to rent expense, under the leases, common area
maintenance and property taxes are paid and the amount can fluctuate according to the costs incurred. Rent
commitments including reasonably certain renewal options that are generally present, were as follows:

2019.............................................................................................................................................. $
2020..............................................................................................................................................
2021..............................................................................................................................................
2022..............................................................................................................................................
2023..............................................................................................................................................
Thereafter.....................................................................................................................................

TOTAL ................................................................................................................................... $

453
394
410
303
246
1,660
3,466

NOTE 9 – GOODWILL AND INTANGIBLE ASSETS

Goodwill associated with the Company’s purchases of Monitor in August 2017, Bowers in June 2016 and other past
acquisitions totaled $38.2 million at December 31, 2018 and 2017. The Monitor acquisition is more fully described
in Note 2 - Business Acquisitions. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its
fair value, which is determined through a two-step impairment test. Management performs goodwill impairment
testing on an annual basis as of September 30. The Fair value of the reporting unit is determined based on a
discounted cash flow model.

Acquired Intangible Assets

Acquired intangible assets were as follows:

2018

2017

Gross
Carrying
Amount

Accumulated

Amortization

Gross
Carrying
Amount

Accumulated
Amortization

Other intangible:

Customer relationship intangibles .................................. $
Non-compete contracts...................................................
Trade Name ....................................................................
Core deposit intangible...................................................
Total ..................................................................................... $

7,210 $
430
520
6,254
14,414 $

(5,481) $
(380)
(229)
(2,573)
(8,663) $

7,210 $
430
520
6,254
$

14,414

(4,919)
(376)
(175)
(1,776)
(7,246)

Aggregate amortization expense was $1.4 million for 2018 and $1.5 million for 2017 and 2016.

Estimated amortization expense for each of the next five years and thereafter:

TOTAL ................................................................................................................................... $

1,306
1,203
1,142
1,025
514
561
5,751

NOTE 10 - INTEREST BEARING DEPOSITS

Time deposits of $250 thousand or more were $79.8 million and $51.9 million at year-end 2018 and 2017.

Following is a summary of scheduled maturities of certificates of deposit and brokered time deposits during the
years following December 31, 2018:

2019............................................................................................................................................... $
2020...............................................................................................................................................
2021...............................................................................................................................................
2022...............................................................................................................................................
2023...............................................................................................................................................
Thereafter ......................................................................................................................................

TOTAL .................................................................................................................................... $

172,193
86,876
63,455
15,934
26,862
7,140
372,460

Following is a summary of year-end interest bearing deposits:

Demand...................................................................................................... $
Money market............................................................................................
Savings ......................................................................................................
Brokered time deposits ..............................................................................
Certificates of deposit................................................................................

TOTAL................................................................................................. $

2018
581,808 $
198,067
225,435
25,000
347,460
1,377,770 $

2017
440,347
253,181
234,940
0
263,905
1,192,373

NOTE 11 – SHORT-TERM BORROWINGS

The Bank has short-term advances from the FHLB that had maturity dates of less than one year at the time of the
advance. All balances are due within one year and can be renewed at the time of maturity. FHLB advances are
secured by pledgings described in the following Long-Term Borrowings footnote. Balances at year end were as
follows:

2018

Weighted
Average
Rate

2017

Weighted
Average
Rate

Amount

Repurchase advance with a rate of 1.42% to 2.45% at
December 31, 2018 and 2017........................................... $ 140,000
Fixed rate advances with a rate of 1.43% to 2.62% at
December 31, 2018 and 2017...........................................
100,000
Total advances ..................................................................... $ 240,000

2.45% $ 125,000

1.47%

2.54%
90,000
2.49% $ 215,000

1.45%
1.46%

Securities sold under repurchase agreements are secured by the Bank’s holdings of debt securities issued by U.S.
government sponsored entities and agencies. These pledged securities which are 105% of the repurchase agreement
balances, had a carrying amount of $4.6 million and $77.9 million at year ended 2018 and 2017.

Repurchase agreements are financing arrangements that mature within 89 days and usually overnight. Under the
agreements, customers agree to maintain funds on deposit with the Bank and in return acquire an interest in a pool of
securities pledged as collateral against the funds. The securities are held in segregated safekeeping accounts at the
Federal Reserve Bank, Farmers Trust and the FHLB. Information concerning securities sold under agreements to
repurchase is summarized as follows:

2017
82,627

94,208

$
0.13%
$
0.14%
$

74,215

2016
84,368

0.07%

98,687

0.08%

78,110

2018
51,694

87,163

$
0.67%
$
0.67%
$

4,409

Average balance during the year ...................................................... $
Average interest rate during the year ...............................................
Maximum month-end balance during the year ................................ $
Weighted average year-end interest rate ..........................................
Balance at year-end .......................................................................... $

The following table provides a disaggregation of the obligation by class of collateral pledged for short-term
financing obtained through the sales of repurchase agreements:

Overnight and continuous repurchase agreements

U.S. Treasury and U.S. government sponsored entities................................ $
State and political subdivisions .....................................................................
Mortgage-backed securities - residential.......................................................
Collateralized mortgage obligations..............................................................
Total borrowings................................................................................................. $

2018

2017

332 $
664
3,094
319
4,409 $

4,811
20,696
43,936
4,772
74,215

Management believes the risks associated with the agreements are minimal and in the case of collateral decline the
Company has additional investment securities available to adequately pledge as guarantees for the repurchase
agreements.

The Bank has access to lines of credit amounting to $35 million at two major domestic banks that are below prime
rate. The lines and terms are periodically reviewed by the banks and are generally subject to withdrawal at their
discretion. There were no borrowings under these lines at December 31, 2018 and 2017.

Farmers has two unsecured revolving lines of credit for $6.5 million. The lines can be renewed annually. The lines
have interest rates of prime with floors of 3.5% and 4.5%. The outstanding balance on the two lines was $350
thousand at December 31, 2018 and 2017. The interest rate on the outstanding balance at December 31, 2018 and
2017 was 5.5% and 4.5%.

NOTE 12 – LONG-TERM BORROWINGS

At year end, long-term advances from the FHLB were as follows:

2018

2017

Weighted
Average
Rate

Amount

Weighted
Average
Rate

Amount

Fixed-rate constant payment advance, at 1.70% at
December 31, 2018 and 2017........................................... $
Total advances ..................................................................... $

3,775
3,775

1.70% $
1.70% $

4,785
4,785

1.70%
1.70%

Long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage, commercial real
estate, and multi-family loans totaling $552.6 million and $280.2 million at year end 2018 and 2017. Based on this
collateral, the Bank is eligible to borrow an additional $308.8 million at year end 2018. Each advance is subject to a
prepayment penalty if paid prior to its maturity date.

Scheduled payments of long-term FHLB advances are as follows:

Maturing in:
2019.............................................................................................................................................. $
2020..............................................................................................................................................
2021..............................................................................................................................................
2022..............................................................................................................................................
2023..............................................................................................................................................
Thereafter.....................................................................................................................................

TOTAL ................................................................................................................................... $

996
860
792
729
398
0
3,775

The Company added a special purpose entity to hold $2.1 million in Trust Preferred Debenture as part of the Tri-
State acquisition in 2015. The debt has a floating rate that is determined quarterly based on the three-month LIBOR.
At December 31, 2018, the interest rate was 4.49%. These securities can be redeemed at any quarter-end. Final
maturity of the Trust Preferred Debenture is December 15, 2036. The balance of the outstanding Trust Preferred
Debenture was $2.3 and $2.2 million at year end 2018 and 2017.

NOTE 13 – COMMITMENTS AND CONTINGENT LIABILITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are
issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire
without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make such commitments as are used for
loans, including obtaining collateral at exercise of the commitment.

The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:

2018

2017

Commitments and unused lines of credit ..... $

Fixed Rate Variable Rate Fixed Rate Variable Rate
265,260

287,551 $

74,119 $

86,952 $

Commitments to make loans are generally made for periods of 30 days or less. Commitments and fixed rate unused
lines of credit have interest rates ranging from 2.99% to 16.00% at December 31, 2018 and 2017.

Standby letters of credit are considered financial guarantees. The standby letters of credit have a contractual value
of $5.2 million at December 31, 2018 and $4.9 million at December 31, 2017. The carrying amount of these items
on the balance sheet is not material.

Additionally, the Company has committed up to a $8 million subscription in SBIC investment funds. At December
31, 2018, the Company had invested $6.0 million in these funds.

NOTE 14 – STOCK BASED COMPENSATION

During 2017, the Company, with the approval of shareholders, created the 2017 Equity Incentive Plan (the “2017
Plan”). The 2017 Plan permits the award of up to 800 thousand shares to the Company’s directors and employees to
attract and retain exceptional personnel, motivate performance and most importantly to help align the interests of
Farmers’ executives with those of the Company’s shareholders. There were 25,729 service time based shares and
62,919 performance based shares granted under the 2017 Plan during the year ended December 31, 2018, as shown
in the table below. The actual number of performance based stock awards issued will depend on certain performance
conditions which are mainly average return on equity compared to a group of peer companies over a three year
vesting period.

During 2012, the Company, with the approval of shareholders, created the 2012 Equity Incentive Plan (the “2012
Plan”). The 2012 Plan permitted the award of up to 500 thousand shares to the Company’s directors and employees
to promote the Company’s long-term financial success by motivating performance through long-term incentive
compensation and to better align the interests of its employees with those of its shareholders. There were no
additional shares granted under the Plan during 2018. Any new restricted stock awards will be issued under the
2017 Plan described above.

The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common
stock at the date of grant. Expense recognized was $1.7 million for 2018, $2.4 million for 2017 and $892 thousand
for 2016. As of December 31, 2018, there was $1.5 million of total unrecognized compensation expense related to
the non-vested shares granted under the Plan. The remaining cost is expected to be recognized over 2.20 years.

The following is the activity under the Plans during 2018:

Maximum
Awarded

Service Units

Weighted
Average
Grant Date
Fair Value

Maximum
Awarded
Performance
Units

Weighted
Average
Grant Date
Fair Value

Beginning balance - non-vested shares........................................
Granted.........................................................................................
Vested ..........................................................................................
Forfeited.......................................................................................
Ending balance - non-vested shares.............................................

323,331 $
25,729
(261,105)
0

87,955 $

9.20
14.83
8.46
0
13.04

266,515 $
62,919
(63,873)
(61,733)
203,828 $

9.43
14.31
7.76
7.76
11.96

The 324,978 shares that vested in 2018 had a weighted average fair value of $15.21 per share.

NOTE 15 – REGULATORY MATTERS

Banks and financial holding companies are subject to various regulatory capital requirements administered by the
federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action
regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under
regulatory accounting practices. The new minimum capital requirements associated with the Basel Committee on
capital and liquidity regulation (Basel III) was phased in beginning on January 1, 2015 and continued through
January 1, 2019. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct
material effect on the financial statements. Management believes as of December 31, 2018, the Company and the
Bank meet all capital adequacy requirements to which they are subject.

The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial
holding companies and insured depository institutions, including the Company and the Bank, to make them
consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).

The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective
capital amounts by risk-weighted assets. The leverage ratio is calculated by dividing tier 1 capital by adjusted
average total assets.

Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not
hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total
capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital
requirements. The capital conservation buffer began the phase in January 1, 2016 and increased each year and was
fully implemented at 2.5% on January 1, 2019. The capital conservation buffer was 1.875% during 2018 and was
1.25% during 2017. The buffer required an additional capital amount of $34.4 million at year end 2018 and an
additional $21.0 million at year end 2017. Excluding the additional capital conservation buffer, Basel III requires
the Company and the Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets
of at least 4.5%, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio
of total capital to risk-weighted assets of at least 8.0% and (iv) a minimum leverage ratio of at least 4.0%.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to
represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept
brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end 2018 and 2017, the most recent regulatory notifications categorized the
Bank 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.

Dividend Restrictions: The Company’s principal source of funds for dividend payments is dividends received from
the Bank, Farmers Trust and NAI. The Bank and Farmers Trust are subject to the dividend restrictions set forth by
the Comptroller of the Currency and Ohio Department of Commerce – Division of Financial Institutions,
respectively. The respective regulatory agency 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. During 2019, the Bank could,
without prior approval, declare dividends of approximately $39.0 million plus any 2019 net profits retained to the
date of the dividend declaration. In order to practice trust powers, Farmers Trust must maintain a minimum capital
of $3 million. Farmers Trust would also be able to, without prior approval, declare dividends of $603 thousand plus
any 2019 net profits retained to the date of the dividend declaration.

Actual and required capital amounts (not including the capital conservation buffer) and ratios are presented below at
year-end:

Actual

Amount

Ratio

Requirement For Capital
Adequacy Purposes:
Ratio

Amount

To be Well Capitalized
Under Prompt Corrective
Action Provisions:
Ratio

Amount

2018
Common equity tier 1 capital ratio

Consolidated ......................................... $ 222,892
Bank...................................................... 210,409

12.16% $ 82,478
11.51% 82,242

4.5% N/A N/A
4.5% 118,795
6.5%

Total risk based capital ratio

Consolidated ......................................... 238,742
Bank...................................................... 224,001

13.03% 146,628
12.26% 146,209

8.0% N/A N/A
8.0% 182,761
10.0%

Tier I risk based capital ratio

Consolidated ......................................... 225,150
Bank...................................................... 210,409

12.28% 109,971
11.51% 109,656

6.0% N/A N/A
6.0% 146,209
8.0%

Tier I leverage ratio

Consolidated ......................................... 225,150
Bank...................................................... 210,409

9.91% 90,900
9.32% 90,324

4.0% N/A N/A
4.0% 112,905
5.0%

2017
Common equity tier 1 capital ratio

Consolidated ......................................... $ 199,201
Bank...................................................... 192,080

11.86% $ 75,573
11.45% 75,462

4.5% N/A N/A
4.5% 109,001
6.5%

Total risk based capital ratio

Consolidated ......................................... 213,725
Bank...................................................... 204,395

12.73% 134,352
12.19% 134,155

8.0% N/A N/A
8.0% 167,694
10.0%

Tier I risk based capital ratio

Consolidated ......................................... 201,410
Bank...................................................... 192,080

11.99% 100,764
11.45% 100,616

6.0% N/A N/A
6.0% 134,155
8.0%

Tier I leverage ratio

Consolidated ......................................... 201,410
Bank...................................................... 192,080

9.50% 84,800
9.12% 84,253

4.0% N/A N/A
4.0% 105,316
5.0%

NOTE 16 – EMPLOYEE BENEFIT PLANS

The Company has a qualified 401(k) deferred compensation Retirement Savings Plan (the “Savings Plan”). All
employees of the Company who have completed at least 90 days of service and meet certain other eligibility
requirements are eligible to participate in the Savings Plan. Under the terms of the Savings Plan, employees may
voluntarily defer a portion of their annual compensation 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 Savings Plan. Total expense was $573 thousand, $556 thousand and $506 thousand for the years
ended December 31, 2018, 2017 and 2016, respectively.

During 2014, the Company adopted a profit sharing plan to provide associates not participating in a current
incentive plan a vehicle for sharing in the success of the Company outside of existing wages and non-monetary
benefits. The Board of Directors approved a profit sharing amount equal to 1% of annual compensation for
associates in 2018, 2017 and 2016. The expense was $78 thousand, $105 thousand and $103 thousand for the years
ended December 31, 2018, 2017 and 2016, respectively.

The Company maintains a deferred compensation plan for certain retirees. Expense under this plan was $8 thousand
for the years ended December 31, 2018 and 2017 and $9 thousand for the year ended December 31, 2016. The
liability under the deferred compensation plan at December 31, 2018 was $124 thousand and $133 thousand at
December 31, 2017.

During 2015, the Company established a nonqualified deferred compensation plan for a select group of management
or highly compensated eligible individuals. Under the terms of the plan, eligible individuals may elect to defer
receipt of their compensation to a later taxable year. The Company has recorded both an asset and liability of equal
amount that represents the amount of contributions and the payable due to the participants in the plan. The recorded
asset and liability was $753 thousand, $566 thousand and $345 thousand at December 31, 2018, 2017 and 2016,
respectively.

As part of the NBOH acquisition the Company has a director retirement and death benefit plan for the benefit of
prior members of the Board of Directors of NBOH. The plan is designed to provide an annual retirement benefit to
be paid to each director upon retirement from the Board and attaining age 70. There are no additional benefits or
participants being added to the plan and the liability recorded at December 31, 2018 and 2017 was $941 thousand
and $1 million, respectively. The benefit payment upon satisfying the plan’s requirements is a benefit to the
qualifying director until death or a maximum of 15 years. A benefit was recognized under the plan of $19 thousand
in 2018. An expense under this plan of $91 thousand and $130 was recorded in 2017 and 2016, respectively.

The Company assumed an employee stock ownership plan (“ESOP”) as part of the Tri-State acquisition that covered
substantially all of their employees and officers. The Company terminated this plan during 2017. The trustee had
discretionary authority to purchase shares of common stock of Tri-State on the open market. There were no
contributions to the plan in 2018 or 2017. During the acquisition, the Tri-State ESOP shares were converted to the
Company’s shares and distributed to participants. The trustee held no shares at December 31, 2018, and 2017.

The Company had a postretirement health care benefit plan that covered individuals retired from the Company that
met certain service and age requirements and certain other active employees that have met similar service
requirements. The Company terminated the plan during 2017. A benefit was recognized under the plan of $70
thousand and $184 thousand at December 31, 2017 and 2016, respectively. Due to the termination of the plan the
accrued postretirement benefit liability at December 31, 2018 and 2017 is $0. Due to the immateriality of the plan,
the disclosures required under U.S. generally accepted accounting principles have been omitted.

The provision for income taxes (credit) consists of the following:

NOTE 17 – INCOME TAXES

Current expense................................................................................. $
Deferred expense (benefit)................................................................
TOTALS ........................................................................................... $

2018
6,123 $
(409)
5,714 $

2017
9,451 $
999
10,450 $

2016
8,642
(1,157)
7,485

Effective tax rates differ from federal statutory rate of 21% in 2018 and 35% in 2017 and 2016 that were applied to
income before income taxes due to the following:

Statutory tax ...................................................................................... $
Effect of nontaxable interest........................................................
Bank owned life insurance, net....................................................
Tax credits ...................................................................................
Effect of nontaxable insurance premiums ...................................
Stock compensation.....................................................................
Impact of enactment of federal tax reform ..................................
Nondeductible acquisition costs ..................................................
Other ............................................................................................
ACTUAL TAX ................................................................................. $

Deferred tax assets (liabilities) are comprised of the following:

2018
8,039 $
(1,439)
(182)
24
(188)
(486)
0
0
(54)
5,714 $

2017
11,606 $
(2,054)
(291)
(371)
(348)
0
1,793
70
45
10,450 $

Deferred tax assets:

Allowance for credit losses ........................................................................... $
Net unrealized loss on securities available for sale.......................................
Deferred and accrued compensation .............................................................
Deferred loan fees and costs..........................................................................
Nonaccrual loan interest income ...................................................................
Other-than-temporary impairment ................................................................
Restricted stock .............................................................................................
AMT credit carryforward ..............................................................................
Other..............................................................................................................

Gross deferred tax assets ......................................................................... $

Deferred tax liabilities:

Depreciation and amortization ...................................................................... $
Net unrealized gain on securities available for sale ......................................
Federal Home Loan Bank dividends.............................................................
Purchase accounting adjustments..................................................................
Mortgage servicing rights .............................................................................
Prepaid expenses ...........................................................................................
Other..............................................................................................................
Gross deferred tax liabilities ....................................................................

NET DEFERRED TAX ASSET ........................................................................ $

2018

2,837 $
1,040
1,065
580
432
25
431
0
94
6,504 $

(467) $
0
(658)
(552)
(308)
(204)
(12)
(2,201)
4,303 $

No valuation allowance for deferred tax assets was recorded at December 31, 2018 and 2017.

2016
9,815
(1,684)
(283)
(367)
(143)
0
0
40
107
7,485

2017

2,525
0
981
517
416
25
647
64
73
5,248

(448)
(159)
(656)
(744)
(261)
(277)
(8)
(2,553)
2,695

100

At December 31, 2018 and December 31, 2017, the Company had no unrecognized tax benefits recorded. The
Company does not expect the amount of unrecognized tax benefits to significantly change within the next twelve
months.

The Company is subject to U.S. federal income tax. The Company is no longer subject to examination by the federal
taxing authority for years prior to 2015. The tax years 2015—2018 remain open to examination by the U.S. taxing
authority.

In December of 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The
Act included several provisions that affected the Company’s federal income tax expense, which reduced the federal
income tax rate to 21% effective January 1, 2018. As a result of the rate reduction, the Company was required to re-
measure, through income tax expense in the period of enactment, the deferred tax assets and liabilities using the
enacted rate at which these items are expected to be recovered or settled. The re-measurement of the Company’s net
deferred tax asset resulted in additional income tax expense of $1.8 million in 2017.

101

NOTE 18 – OTHER COMPREHENSIVE INCOME (LOSS)

The following table represents the detail of other comprehensive income (loss) for the years ended December 31,
2018, 2017 and 2016.

Unrealized holding losses on available-for-sale securities during the year ................. $
Reclassification adjustment for gains included in net income (1)................................
Net unrealized losses on available-for-sale securities ..................................................
Change in funded status of post-retirement health plan ...............................................
Net other comprehensive loss....................................................................................... $

Unrealized holding gains on available-for-sale securities during the year .................. $
Reclassification adjustment for gains included in net income (1)................................
Net unrealized gains on available-for-sale securities ...................................................
Change in funded status of post-retirement health plan ...............................................
Net other comprehensive income ................................................................................. $

Pre-tax

(5,343)
(283)
(5,626)
0
(5,626)

Pre-tax

5,107
(4)
5,103
(55)
5,048

Pre-tax

(4,270)
(73)
(4,343)
(156)
(4,499)

1,110
59
1,169
0
1,169

2018
Tax

2017
Tax

(1,788)
2
(1,786)
19
(1,767)

2016
Tax

1,494
26
1,520
55
1,575

After-Tax

(4,233)
(224)
(4,457)
0
(4,457)

After-Tax

3,319
(2)
3,317
(36)
3,281

After-Tax

(2,776)
(47)
(2,823)
(101)
(2,924)

(1)

Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and
the tax impact is included in income tax expense on the consolidated statements of income.

NOTE 19 – RELATED PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates during 2018 were as follows:

Beginning balance........................................................................................................................ $
New loans.....................................................................................................................................
Effect of changes in composition of related parties.....................................................................
Repayments..................................................................................................................................
Ending balance............................................................................................................................. $

20,521
951
0
(5,164)
16,308

Deposits from principal officers, directors, and their affiliates at year-end 2018 and 2017 were $11.6 million and
$5.9 million.

102

The factors used in the earnings per share computation follow:

NOTE 20 – EARNINGS PER SHARE

Basic EPS

Net income ............................................................................ $
Weighted average shares outstanding ...................................
Basic earnings per share ............................................... $

$
32,569
27,674,705
$

1.18

22,711
$
27,567,909
$

0.82

20,557
27,180,230
0.76

2018

2017

2016

Diluted EPS

Net income ............................................................................ $
Weighted average shares for basic earnings per share..........
Average unvested restricted stock awards ............................
Weighted average shares for diluted earnings per share .......
Diluted earnings per share ............................................ $

$
32,569
27,674,705
299,480
27,974,185
$

1.16

22,711
$
27,567,909
51,167
27,619,076
0.82 $

20,557
27,180,230
29,108
27,209,338
0.76

There were no restricted stock awards that were considered anti-dilutive at year end 2018, 2017 and 2016.

NOTE 21 – INTEREST RATE SWAPS

The Company uses a program that utilizes interest-rate swaps as part of its asset/liability management strategy. The
interest-rate swaps are used to help manage the Company’s interest rate risk position and not as derivatives for
trading purposes. The notional amount of the interest-rate swaps does not represent amounts exchanged by the
parties. The amount exchanged is determined by reference to the notional amount and the other terms of the
individual interest-rate swap agreements.

The objective of the interest-rate swaps is to protect the related fixed rate commercial real estate loans from changes
in fair value due to changes in interest rates. The Company has a program whereby it lends to its borrowers at a
fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the
event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap. The yield
maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as
such, the swaps and embedded derivatives are not designated as hedges. Accordingly, both instruments are carried
at fair value and changes in fair value are reported in current period earnings.

Summary information about these interest-rate swaps as of year ended December 31, 2018, 2017 and 2016 is as
follows:

Notional amounts ............................................................... $
Weighted average pay rate on interest-rate swaps .............
Weighted average receive rate on interest-rate swaps........
Weighted average maturity (years) ....................................
Fair value of interest-rate swaps......................................... $
Fair value of loan yield maintenance provisions................ $

2018
35,996

$
4.53%
4.78%
4.4
(767)
767

$
$

2017
38,481

$
4.46%
3.81%
3.2
(653)
653

$
$

2016
34,360

4.34%
3.04%
4.8
(685)
685

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other
liabilities, respectively, in the consolidated balance sheet. Changes in the fair value of the yield maintenance
provisions and interest-rate swaps are reported in earnings, as other noninterest income in the consolidated income
statements. There were no net gains or losses recognized in earnings related to yield maintenance provisions for
years ended December 31, 2018, 2017 and 2016.

103

NOTE 22 – SEGMENT INFORMATION

The reportable segments are determined by the products and services offered, primarily distinguished between
banking, trust and retirement consulting operations. They are also distinguished by the level of information
provided to the chief operating decision makers in the Company, who use such information to review performance
of various components of the business, which are then aggregated. Loans, investments and deposits provide the
revenues in the banking operation, trust service fees provide the revenue in trust operations and consulting fees
provide the revenues in the retirement consulting operations. All operations are domestic.

Accounting policies for segments are the same as those described in Note 1. Segment performance is evaluated
using operating income. Income taxes are calculated on operating income. Transactions among segments are made
at fair value.

Significant segment totals are reconciled to the financial statements as follows:

December 31, 2018
Assets
Goodwill and other intangibles ............... $
Total assets .............................................. $

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Eliminations
and
Others

Consolidated
Totals

4,199 $

38,113 $
11,490 $ 2,309,644 $

2,462 $
3,060 $

(822) $
43,952
4,670 $ 2,328,864

December 31, 2017
Goodwill and other intangibles ............... $
Total assets .............................................. $

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Eliminations
and
Others

Consolidated
Totals

4,426 $

39,120 $
11,261 $ 2,140,508 $

2,645 $
3,365 $

45,369
(822) $
3,935 $ 2,159,069

For year ended 2018
Net interest income.................................. $
Provision for loan losses..........................
Service fees, security gains and other
noninterest income................................
Noninterest expense.................................
Amortization and depreciation expense ....
Income before taxes ...........................
Income tax ...............................................
Net Income......................................... $

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Eliminations
and
Others

Consolidated
Totals

141 $
0

78,446 $
3,000

0 $
0

(86) $
0 $

7,258
4,863
249
2,287
483
1,804 $

16,887
52,635
2,494
37,204
5,653
31,551 $

1,684
1,388
199
97
21
76 $

(330) $
889 $
0 $
(1,305)
(443) $
(862) $

78,501
3,000

25,499
59,775
2,942
38,283
5,714
32,569

For year ended 2017
Net interest income.................................. $
Provision for loan losses..........................
Service fees, security gains and other
noninterest income................................
Noninterest expense.................................
Amortization and depreciation expense ....
Income before taxes ...........................
Income tax ...............................................
Net Income......................................... $

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Eliminations
and
Others

Consolidated
Totals

109 $
0

73,618 $
3,350

0 $
0

(81) $
0 $

6,548
4,801
277
1,579
455
1,124 $

15,986
50,903
2,558
32,793
10,890
21,903 $

1,857
1,363
255
239
(23)
262 $

(340) $
1,029 $
0 $
(1,450) $
(872) $
(578) $

73,646
3,350

24,051
58,096
3,090
33,161
10,450
22,711

104

For year ended 2016
Net interest income.................................. $
Provision for loan losses..........................
Service fees, security gains and other
noninterest income................................
Noninterest expense.................................
Amortization and depreciation expense ....
Income before taxes ...........................
Income tax ...............................................
Net Income......................................... $

Trust
Segment

Bank
Segment

Retirement
Consulting
Segment

Eliminations
and
Others

Consolidated
Totals

95 $
0

68,113 $
3,870

0 $
0

(88) $
0

6,341
4,818
305
1,313
462
851 $

15,191
48,804
2,519
28,111
7,586
20,525 $

1,990
1,380
307
303
107
196 $

(278)
1,319
0
(1,685)
(670)
(1,015) $

68,120
3,870

23,244
56,321
3,131
28,042
7,485
20,557

Bank segment includes Farmers Insurance and Investment.

NOTE 23 – QUARTERLY FINANCIAL DATA (UNAUDITED)

March 31

Quarter Ended 2018
Total interest income........................................................... $
Total interest expense..........................................................
Net interest income .............................................................
Provision for loan losses .....................................................
Noninterest income .............................................................
Merger related costs ............................................................
Noninterest expense ............................................................
Income before income taxes ...............................................
Income taxes .......................................................................
Net income .......................................................................... $

21,282 $
2,336
18,946
775
6,010
25
15,071
9,085
1,359
7,726 $

June 30 September 30 December 31
24,447
4,373
20,074
525
6,705
(180)
16,163
10,271
1,585
8,686

23,563 $
3,644
19,919
950
6,478
0
16,180
9,267
1,183
8,084 $

22,474 $
2,912
19,562
750
6,306
0
15,458
9,660
1,587
8,073 $

Earnings per share - basic and diluted ................................ $

0.28 $

0.29 $

0.31

March 31

Quarter Ended 2017
Total interest income........................................................... $
Total interest expense..........................................................
Net interest income .............................................................
Provision for loan losses .....................................................
Noninterest income .............................................................
Merger related costs ............................................................
Noninterest expense ............................................................
Income before income taxes ...............................................
Income taxes .......................................................................
Net income .......................................................................... $

18,850 $
1,319
17,531
1,050
5,887
62
14,456
7,850
2,067
5,783 $

June 30 September 30 December 31
21,084
2,017
19,067
400
6,051
452
14,852
9,414
4,179
5,235

20,551 $
1,876
18,675
950
6,058
270
15,425
8,088
2,105
5,983 $

20,042 $
1,669
18,373
950
6,055
104
15,565
7,809
2,099
5,710 $

Earnings per share - basic and diluted ................................ $

0.21 $

0.22 $

0.19

105

NOTE 24 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Below is condensed financial information of Farmers National Banc Corp. (parent company only). This information
should be read in conjunction with the consolidated financial statements and related notes.

December 31,
BALANCE SHEETS

Assets:
Cash............................................................................................................... $
Investment in subsidiaries

Bank ......................................................................................................
Farmers Trust ........................................................................................
NAI........................................................................................................
Captive ..................................................................................................
Equity securities ............................................................................................
Other..............................................................................................................

TOTAL ASSETS............................................................................. $

Liabilities:

Other liabilities ........................................................................................ $
Note payable ............................................................................................
Subordinate debt ......................................................................................
Other accounts payable............................................................................
TOTAL LIABILITIES ....................................................................
TOTAL STOCKHOLDERS' EQUITY...........................................
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $

2018

2017

4,131 $

3,614

244,577
10,745
2,325
1,654
367
1,393
265,192 $

264 $
350
2,258
0
2,872
262,320
265,192 $

224,843
10,495
2,649
1,584
258
1,442
244,885

250
350
2,209
2
2,811
242,074
244,885

STATEMENTS OF INCOME
Years ended December 31,

Income:

Dividends from subsidiaries

2018

2017

2016

Bank..................................................................................... $
Farmers Trust ......................................................................
NAI ......................................................................................
Captive Insurance................................................................
Interest and dividends on securities .......................................
Security gains/(losses)............................................................
Other income..........................................................................
TOTAL INCOME..........................................................
Interest on borrowings............................................................
Other expenses .......................................................................

Income before income tax benefit and undistributed
subsidiary income .................................................................
Income tax benefit.................................................................

Equity in undistributed net income of subsidiaries
(dividends in excess of net income) .......................................

Bank .......................................................................................
Farmers Trust .........................................................................
NAI.........................................................................................
Captive ...................................................................................
NET INCOME ............................................................... $

7,864 $
1,500
400
850
8
(20)
0
10,602
(133)
(2,087)

8,373 $
825
400
0
5
0
0
9,603
(103)
(2,294)

8,382
450

7,206
876

23,687
304
(324)
70
32,569 $

13,529
299
(138)
939
22,711 $

5,836
820
800
0
5
(19)
28
7,470
(96)
(1,997)

5,377
670

14,688
31
(604)
395
20,557

106

STATEMENTS OF CASH FLOWS
Years ended December 31,
Cash flows from operating activities:

Net income................................................................................... $
Adjustments to reconcile net income to net cash ........................

from operating activities:

Security (gains)/losses............................................................
Impairment of securities.........................................................
Dividends in excess of net income (Equity in
undistributed net income of subsidiary)..............................
Other..................................................................................
NET CASH FROM OPERATING ACTIVITIES .........

2018

2017

2016

32,569 $

22,711 $

20,557

0
0

19
0

(23,737)
1
8,833

(14,629)
78
8,160

(14,510)
(368)
5,698

Cash flows from investing activities:

Proceeds from maturities of available for sale securities.......
Net cash paid in business combinations............................
NET CASH FROM INVESTING ACTIVITIES ..........

0
0
0

0
(1,154)
(1,154)

59
0
59

Cash flows from financing activities:

Proceeds from reissuance of treasury shares..........................
Repurchase of common shares...............................................
Cash dividends paid.............................................................
NET CASH FROM FINANCING ACTIVITIES..........
NET CHANGE IN CASH AND CASH
EQUIVALENTS............................................................

0
0
(8,316)
(8,316)

0
0
(6,012)
(6,012)

0
(168)
(4,326)
(4,494)

517

994

1,263

Beginning cash and cash equivalents................................................
Ending cash and cash equivalents ..................................................... $

3,614
4,131 $

2,620
3,614 $

1,357
2,620

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

On January 30, 2019, the Company engaged CliftonLarsonAllen, LLP (“CLA”) to serve as the Company’s

independent registered public accounting firm for the fiscal year ending December 31, 2019, upon the
recommendation and approval of the Audit Committee (the “Audit Committee”) of the Board of Directors and the
approval by the Board of Directors. The engagement of CLA resulted from a competitive request for proposal
process undertaken by the Audit Committee pursuant to which the Audit Committee received proposals from CLA,
Crowe LLP (“Crowe”), and one other independent registered public accounting firm.

During the Company’s two most recent fiscal years ended December 31, 2017 and 2018, and the
subsequent interim period through January 30, 2019, neither the Company nor anyone on its behalf consulted with
CLA regarding either (i) the application of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a
written report nor oral advice was provided that CLA concluded was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a “disagreement” or a “reportable event,” as those terms are defined in Item 304 of Regulation
S-K and the related instructions.

On January 29, 2019, the Company notified Crowe that it has been dismissed as the Company’s

independent registered public accounting firm effective as of the completion of the audit of the Company’s
consolidated financial statements for the fiscal year ending December 31, 2018. Crowe has served as the
Company’s independent public accounting firm since 2003. Crowe will continue to serve as the Company’s

107

independent public accounting firm until the completion of the audit of the Company’s consolidated financial
statements for the fiscal year ending December 31, 2018.

Crowe’s reports on the Company’s consolidated financial statements for each of the two most fiscal years

ended December 31, 2016 and 2017 did not contain any adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company’s two
most recent fiscal years ended December 31, 2017 and 2018, and the subsequent interim period through January 30,
2019, (i) there were no disagreements between the Company and Crowe on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Crowe, would have caused Crowe to make reference to the subject matter of the disagreements in its
report on the consolidated financial statements for such years, and (ii) there were no “reportable events” as that term
is defined in Item 304 of Regulation S-K.

Item 9A. Controls and Procedures.

As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an

evaluation, under the supervision and with the participation of the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective
to ensure that the financial and nonfinancial information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934, as amended, including this Annual Report on Form
10-K for the period ended December 31, 2018, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.

Management’s responsibilities related to establishing and maintaining effective disclosure controls and

procedures include maintaining effective internal controls over financial reporting that are designed to produce
reliable financial statements in accordance with GAAP. As disclosed in the Report on Management’s Assessment of
Internal Control Over Financial Reporting in the Company’s 2018 Annual Report to Shareholders, management
assessed the Company’s system of internal control over financial reporting as of December 31, 2018, in relation to
criteria for effective internal control over financial reporting as described in the 2013 “Internal Control - Integrated
Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission and found it to be
effective.

Crowe LLP, the Company’s registered public accounting firm, has audited the Company’s internal control
over financial reporting as of December 31, 2018. The audit report by Crowe is located in Item 8 of this report.

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a -

15(f) under the Exchange Act) that occurred during the year ended December 31, 2018, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. There
have been no significant changes in the Company’s internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation or material weaknesses in such internal controls requiring
corrective actions.

Item 9B. Other Information.

None.

108

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by Item 401 of Regulation S-K concerning the directors of the Company and the
nominees for election as directors of the Company at the Annual Meeting of Shareholders to be held on April 18,
2019 (the “2019 Annual Meeting”) is incorporated herein by reference from the information to be included under the
caption “Proposal 1 – Election of Directors” in Farmers’ definitive proxy statement relating to the 2019 Annual
Meeting to be filed with the Commission (“2019 Proxy Statement”).

Executive Officers of the Registrant

The names, ages and positions of Farmers’ executive officers as of March 1, 2019:

Name
Carl D. Culp........................

Age
55

Joseph Gerzina....................

Mark L. Graham .................
Kevin J. Helmick ................
Brian E. Jackson .................
Mark A. Nicastro ................

Michael Oberhaus...............
Joseph W. Sabat..................
Timothy Shaffer..................
Amber Wallace Soukenik ...

Mark J. Wenick...................

Mark R. Witmer..................

64
47
49
48

42
58
57
53

Title

Senior Executive Vice President, Secretary and Treasurer of Farmers and
Senior Executive Vice-President, Cashier and Chief Financial Officer of
Farmers Bank
Senior Vice President, Chief Lending Officer and Regional President of
Farmers Bank

Executive Vice President and Chief Credit Officer of Farmers Bank
President and Chief Executive Officer of Farmers and Farmers Bank
Senior Vice President and Chief Information Officer of Farmers Bank
Senior Vice President and Chief Human Resources Officer of Farmers
Bank
Senior Vice President and Chief Risk Officer of Farmers Bank

Vice President and Controller of Farmers Bank

Senior Vice President and Regional President of Farmers Bank
Executive Vice President and Chief Retail/Marketing Officer of Farmers
Bank
Executive Vice President and Chief Wealth Management Officer of
Farmers Bank
Senior Executive Vice President, Chief Banking Officer of Farmers Bank

Officers are generally elected annually by the Board of Directors. The term of office for all the above

executive officers is for the period ending with the next annual meeting.

Principal Occupation and Business Experience of Executive Officers

Mr. Culp has served as Senior Executive Vice President and Treasurer of Farmers and Senior Executive Vice

President and Chief Financial Officer of Farmers Bank since March 1996. Prior to that time, Mr. Culp was
Controller of Farmers and Farmers Bank from November 1995. Mr. Culp has 33 years of experience in finance and
accounting in the banking industry, and is a certified public accountant.

Mr. Gerzina currently serves as Regional President and Chief Lending Officer, and brings 36 years of

experience in commercial and private banking. Prior to joining Farmers Bank, Mr. Gerzina was a Managing Partner
at Weather Vane Capital, and previously held the role of Senior Vice President and Regional Commercial Manager
(2002-2009) with Huntington National Bank. He was appointed as an executive officer of Farmers in 2012.

Mr. Graham has over 41 years of experience with Farmers Bank. During his tenure, Mr. Graham has held a

variety of positions in Farmers Bank’s commercial loan department. Mr. Graham has served as Executive Vice
President and Chief Credit Officer of Farmers Bank since January 2012; for the four years prior to that appointment,
Mr. Graham served as Senior Vice President and Senior Lending Officer of Farmers Bank.

109

Mr. Helmick is the President and Chief Executive Officer of Farmers and Farmers Bank, a position he has
held since November 2013. Prior to becoming President, Mr. Helmick was Secretary of Farmers and Executive
Vice President – Wealth Management and Retail Services of Farmers Bank since January 2012. Mr. Helmick has
been with the Company for 24 years and has a retail and investment background, including an MBA and CFP
designation. From 1997 through 2008, Mr. Helmick served as the Vice President and Program Manager for Farmers
Investments. In 2008, Mr. Helmick was promoted to Senior Vice President of Wealth Management and Retail
Services where he was responsible for the management and oversight of the retail investment area of Farmers Bank,
Farmers Insurance, and all branch sales and operational functions.

Mr. Jackson is the Senior Vice President and Chief Information Officer of Farmers Bank, a position he has

held since May 2009. Prior to coming to the Company, Mr. Jackson was Assistant Vice President and Information
Technology Manager with Home Savings Bank since 1993. He has over 26 years of experience in the IT field.
Mr. Jackson was appointed as an executive officer in 2012.

Mr. Nicastro is the Senior Vice President and Chief Human Resources Officer of Farmers Bank. Mr. Nicastro
was appointed to that position in 2017 and previously served as Director of Human Resources since joining Farmers
in July 2009. Prior to that, Mr. Nicastro served as Staffing and Compliance Manager for Huntington National Bank
(2007-2008) and Regional Human Resources Manager for Sky Bank from 2004 until 2007. Mr. Nicastro has an
MBA, and has more than 21 years of experience in Human Resource Management from both large multi-national
banks and regional community banks. He was appointed as an executive officer in 2012.

Mr. Oberhaus is currently the Senior Vice President and Chief Risk Officer of Farmers Bank. Mr. Oberhaus

joined Farmers National Bank as part of the merger with First National Bank of Orrville in June of 2015 as the
company’s Enterprise Risk Manager. Prior to the merger Mr. Oberhaus served as the SVP and Chief Risk Officer of
First National Bank of Orrville and brings more than 21 years of experience in banking.

Mr. Sabat has served as Vice President and Controller of Farmers Bank since April 2006. Prior to coming to

the Company, Mr. Sabat was with a regional public accounting firm. Mr. Sabat has 23 years of experience in the
accounting, finance and auditing fields. He is a certified public accountant and was appointed as an executive
officer in 2012.

Mr. Shaffer serves as Regional President and has held that title since July of 2015. Previously, Mr. Shaffer
served as the Director of Commercial Banking & Private Client Services. In October of 2011, Mr. Shaffer joined
Farmers Bank as the Commercial Lending Manager, overseeing commercial lending, small business lending and
treasury management. Mr. Shaffer has over 29 years of Banking and Lending experience in the Mahoning Valley
market. Mr. Shaffer was appointed as an executive officer in 2014.

Ms. Wallace Soukenik has served as Executive Vice President and Chief Retail/Marketing Officer for Farmers
Bank since November 2013. In August 2008, Ms. Wallace Soukenik joined Farmers Bank as Senior Vice President
and Director of Marketing. She has 29 years of experience in the marketing field. Prior to joining the Company,
Ms. Wallace Soukenik served as the Assistant Vice President of Marketing and Physician Relations at Trumbull
Memorial Hospital, where she managed a $14 million endowment, a $1.5 million marketing budget and all
physician contracts. She was appointed as an executive officer in 2012.

Mr. Wenick is Senior Vice President and Chief Wealth Management Officer of Farmers Bank. Prior to
coming to Farmers National Bank in 2017, Mr. Wenick was regional president of Chemical Bank for 3 years. Prior
to that, Mr. Wenick spent 5 years in local bank investment and trust positions. He brings more than 36 years of
financial expertise in the area of wealth management.

Mr. Witmer is the Senior Executive Vice President and Chief Banking Officer of Farmers National Bank. Mr.

Witmer joined Farmers National Bank as part of the merger with First National Bank of Orrville in June of 2015.
Prior to the merger, Mr. Witmer served as the Chief Executive Officer of First National Bank of Orrville. Mr.
Witmer has more than 27 years of leadership, community banking and lending experience.

110

Compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended.

The information required by Item 405 of Regulation S-K is incorporated herein by reference from the

disclosure to be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 2019
Proxy Statement.

Code of Business Conduct and Ethics.

The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that covers all
employees, including its principal executive, financial and accounting officers, and is posted on the Company’s
website www.farmersbankgroup.com. In the event of any amendment to, or waiver from, a provision of the Code of
Ethics that applies to its principal executive, financial or accounting officers, the Company intends to disclose such
amendment or waiver on its website.

Procedures for Recommending Directors Nominees.

Information concerning the procedures by which shareholders may recommend nominees to Farmers’ Board

of Directors is incorporated herein by reference from the information to be included under the caption “Director
Nominations” in 2019 Proxy Statement. These procedures have not materially changed from those described in
Farmers’ definitive proxy materials for the 2018 Annual Meeting of Shareholders.

Audit Committee.

The information required by Items 407(d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference
from the disclosure to be included under the caption “Committees of the Board of Directors – Audit Committee” in
the 2019 Proxy Statement.

Item 11. Executive Compensation.

The information required by Item 402 of Regulation S-K is incorporated herein by reference from the

disclosure to be included under the captions “Compensation Discussion and Analysis” and “Executive
Compensation and Other Information” in the 2019 Proxy Statement.

The information required by Item 407(e)(4) of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “Compensation Committee Interlocks and Insider Participation” in the
2019 Proxy Statement.

The information required by Item 407(e)(5) of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “The Compensation Committee Report” in the 2019 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.

The information required by Item 201(d) of Regulation S-K is incorporated herein by reference from the
disclosure included under the caption “Equity Compensation Plan Information” in the 2019 Proxy Statement of the
Company.

The information required by Item 403 of Regulation S-K is incorporated herein by reference from the
disclosure included under the caption “Beneficial Ownership of Management and Certain Beneficial Owners” in the
2019 Proxy Statement of the Company.

111

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information required by Item 404 of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “Certain Relationships and Related Transactions” in the 2019 Proxy
Statement.

The information required by Item 407(a) of Regulation S-K is incorporated herein by reference from the
disclosure to be included under the caption “The Board of Directors — Independence” in the 2019 Proxy Statement.

Item 14. Principal Accountant Fees and Services.

The information required by this Item 14 is incorporated herein by reference from the disclosure to be
included under the captions “Independent Registered Public Accounting Firm Fees” and “Pre-Approval of Fees” in
the 2019 Proxy Statement.

Item 15. Exhibits, Financial Statement Schedules.

PART IV

(a)(1) Financial Statements

Item 8 Reference is made to the Consolidated Financial Statements included in Item 8 of Part II
herein.

(2) Financial Statement Schedules

No financial statement schedules are presented because they are not applicable.

(3) Exhibits

The exhibits filed or incorporated by reference as a part of this Annual Report on Form 10-K are
listed in the Exhibit Index, which follows and is incorporated herein by reference.

(b)Exhibits

The exhibits filed or incorporated by reference as a part of this Annual Report on Form 10-K are
listed in the Exhibit Index, which follows and is incorporated herein by reference.

(c)Financial Statement Schedules

See subparagraph (a)(2) above.

Item 16. Form 10-K Summary.

None.

112

The following exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K:

INDEX TO EXHIBITS

Exhibit
Number

Description

3.1

3.2

3.3

3.4

10.1*

10.2*

10.3*

10.4*

10.5*

10.6*

10.7*

10.8*

10.9*

Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from
Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on
October 3, 2001 (File No. 333-70806)).

Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by
reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on
May 1, 2013).

Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from
Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011
filed with the Commission on August 9, 2011).

Farmers National Banc Corp. 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.1
to Farmers’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 filed with the
Commission on August 8, 2012).

Farmers National Banc Corp. Cash Incentive Plan (incorporated by reference from Exhibit 10.1 to
Farmers’ Current Report on Form 8-K filed with the Commission on June 24, 2011).

Farmers National Banc Corp. Long-Term Incentive Plan (incorporated by reference from Exhibit 10.1 to
Farmers’ Current Report on Form 8-K filed with the Commission on June 29, 2011).

Farmers National Banc Corp. Nonqualified Deferred Compensation Plan (as amended and restated
effective January 1, 2016) (incorporated by reference from Exhibit 10.4 to Farmers’ Annual Report on
Form 10-K for the year ended December 31, 2016 filed with the Commission on March 7, 2017).

Farmers National Banc Corp. 2016 Form of Notice of Grant and Restricted Stock Award Agreement
under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.8 to Farmers’ Annual
Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on March 7,
2017).

Farmers National Banc Corp. 2016 Form of Cash Long-Term Incentive Award Agreement under Long-
Term Incentive Plan (incorporated by reference from Exhibit 10.9 to Farmers’ Annual Report on Form
10-K for the year ended December 31, 2016 filed with the Commission on March 7, 2017).

Farmers National Banc Corp. 2016 Form of Service-Based Long-Term Equity Incentive Award
Agreement under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.10 to Farmers’
Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on
March 7, 2017).

Farmers National Banc Corp. 2016 Form of Performance-Based Long-Term Equity Incentive Award
Agreement under 2012 Equity Incentive Plan (incorporated by reference from Exhibit 10.11 to Farmers’
Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Commission on
March 7, 2017).

Farmers National Banc Corp. 2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.1
to Farmers’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed with the
Commission on August 8, 2017).

113

Exhibit
Number

10.10*

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

Description

Farmers National Banc Corp. 2017 Form of Notice of Grant of Long-term Incentive Plan Awards under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.2 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on August 8, 2017).

Farmers National Banc Corp. 2017 Form of Performance-Based Cash Award Agreement under 2017
Equity Incentive Plan. (incorporated by reference from Exhibit 10.3 to Farmers’ Quarterly Report on
Form 10-Q filed with the Commission on August 8, 2017).

Farmers National Banc Corp. 2017 Form of Service-Based Restricted Stock Award Agreement under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.4 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on August 8, 2017).

Farmers National Banc Corp. 2017 Form of Performance-Based Equity Award Agreement under 2017
Equity Incentive Plan (incorporated by reference from Exhibit 10.5 to Farmers’ Quarterly Report on
Form 10-Q filed with the Commission on August 8, 2017).

Farmers National Banc Corp. 2018 Form of Notice of Grant of Long-term Incentive Plan Awards under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.1 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on May 9, 2018).

Farmers National Banc Corp. 2018 Form of Performance-Based Equity Award Agreement under 2017
Equity Incentive Plan (incorporated by reference from Exhibit 10.2 to Farmers’ Quarterly Report on
Form 10-Q filed with the Commission on May 9, 2018).

Farmers National Banc Corp. 2018 Form of Service-Based Restricted Stock Award Agreement under
2017 Equity Incentive Plan (incorporated by reference from Exhibit 10.3 to Farmers’ Quarterly Report
on Form 10-Q filed with the Commission on May 9, 2018).

Farmers National Banc Corp. 2018 Form of Performance-Based Cash Award Agreement under 2017
Equity Incentive Plan (incorporated by reference from Exhibit 10.4 to Farmers’ Quarterly Report on
Form 10-Q filed with the Commission on May 9, 2018).

10.18*

Nonemployee Director Compensation for the year ended December 31, 2018 (filed herewith).

10.19*

Farmers National Banc Corp. Form of Indemnification Agreement (incorporated by reference from
Exhibit 10.1 to Farmers’ Current Report on Form 8-K filed with the Commission on April 29, 2011).

10.20*

Farmers National Banc Corp. Amended and Restated Executive Separation Policy (filed herewith).

10.21*

10.22*

31.1

31.2

32.1

Change in Control Agreement with Kevin J. Helmick (incorporated by reference from Exhibit 10.2 to
Farmers’ Current Report on Form 8-K filed with the Commission on November 14, 2013).

Form of Change in Control Agreements for Executive Officers (incorporated by reference from Exhibit
10.3 to Farmers’ Current Report on Form 8-K filed with the Commission on November 14, 2013).

Subsidiaries of Farmers (filed herewith).

Consent of Independent Registered Public Accounting Firm (filed herewith).

Powers of Attorney of Directors and Executive Officers (filed herewith).

Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of
Farmers (principal executive officer) (filed herewith).

Rule 13a-14(a)/15d-14(a) Certification of Carl D. Culp, Executive Vice President and Treasurer of
Farmers (principal financial officer) (filed herewith).

Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive
Officer of Farmers (principal executive officer) (filed herewith).

114

Exhibit
Number

32.2

Certification pursuant to 18 U.S.C. Section 1350 of Carl D. Culp, Executive Vice President and
Treasurer of Farmers (principal financial officer) (filed herewith).

Description

101.INS

XBRL Instance Document (filed herewith).

101.SCH

XBRL Taxonomy Extension Schema Document (filed herewith).

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith).

101.LAB

XBRL Taxonomy Extension Label Linkbase Document (filed herewith).

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith).

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document (filed herewith).

* Constitutes a management contract or compensatory plan or arrangement.

Copies of any exhibits will be furnished to shareholders upon written request. Request should be directed to Carl D.
Culp, Senior Executive Vice President and Treasurer, Farmers National Banc Corp., 20 S. Broad Street, Canfield,
Ohio 44406.

115

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the under signed, thereunto duly authorized.

SIGNATURES

FARMERS NATIONAL BANC CORP.

By /s/ Kevin J. Helmick

Kevin J. Helmick, President and Chief
Executive Officer
March 5, 2019

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Kevin J. Helmick
Kevin J. Helmick

/s/ Carl D. Culp
Carl D. Culp

President, Chief Executive Officer and Director
(Principal Executive Officer)

Senior Executive Vice President, Secretary and
Treasurer

(Principal Financial Officer)

/s/ Joseph W. Sabat*
Joseph W. Sabat

Controller
(Principal Accounting Officer)

/s/ Gregory C. Bestic*
Gregory C. Bestic

Director

/s/ Anne Frederick Crawford* Director
Anne Frederick Crawford

March 5, 2019

/s/ Lance J. Ciroli*
Lance J. Ciroli

/s/ Ralph D. Macali*
Ralph D. Macali

/s/ Terry A. Moore*
Terry A. Moore

/s/ Edward W. Muransky*
Edward W. Muransky

/s/ David Z. Paull*
David Z. Paull

/s/ James R. Smail*
James R. Smail

/s/ Gregg Strollo*
Gregg Strollo

Chairman of the Board

March 5, 2019

Director

March 5, 2019

Vice Chairman of the Board

March 5, 2019

Director

March 5, 2019

The above-named directors and officers of the Registrant sign this Annual Report on Form 10-K by Kevin J.
Helmick and Carl D. Culp, their attorney-in-fact, pursuant to Powers of Attorney signed by the above-named
directors and officers, which Powers of Attorney are filed with this Annual Report on Form 10-K as exhibits,
in the capacities indicated.

116

/s/ Kevin J. Helmick
Kevin J. Helmick
President, Chief Executive Officer and

Director

(Principal Executive Officer)

/s/ Carl D. Culp
Carl D. Culp
Senior Executive Vice President, Secretary

and Treasurer

(Principal Financial Officer)

117

A N N U A L R E P O R T 2 0 1 8

Corporate Profile

Farmers National Banc Corp. (the “Company”) is a multi-bank holding company registered

under the Bank Holding Company Act of 1956, as amended. The Company provides full banking

services through its nationally chartered subsidiary, The Farmers National Bank of Canfield

(“Farmers National Bank”.) The Company provides trust services through its subsidiary, Farmers

Trust Company, retirement planning and consultancy services through its subsidiary, National

Associates, Inc. and insurance services through Farmers National Bank’s subsidiaries, Farmers

National Insurance, LLC, and Bowers Insurance Agency, LLC. Farmers Trust Company has a

state-chartered bank license to conduct trust business from the Ohio Department of Commerce

– Division of Financial Institutions.

Farmers National Bank, chartered in 1887, is a full-service financial services company engaged

in commercial and retail banking with a total of forty-one (41) locations and four (4) trust offices

located in the counties of Mahoning, Trumbull, Columbiana, Stark, Summit, Wayne, Medina,

Holmes and Cuyahoga in the State of Ohio and Beaver in Pennsylvania. In addition, Farmers

National Bank provides 24-hour access to a network of Automated Teller Machines and offers

online, mobile and telephone banking services. Farmers National Bank competes with state

and national banks, as well as with a large number of other financial institutions, such as thrifts,

insurance companies, consumer finance companies, credit unions and commercial finance

leasing companies for deposits, loans and other financial service businesses. The principal

methods by which Farmers National Bank competes are loan interest rates, the rates paid for

funds, the fees charged for services and the availability of services.

As a national banking association, Farmers National Bank is a member of the Federal Reserve

System, is subject to the supervision and regulation of the Office of the Comptroller of the

Currency, and deposits are insured by the Federal Deposit Insurance Corporation to the extent

provided by law.

Forward Looking Statements

Cautionary Note Regarding Forward Looking Statements: This report and the following letter

from our President & Chief Executive Officer contains “forward looking statements” within

the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act

of 1995. For a discussion of factors that could cause future results to differ from historical

performance or those forward-looking statements, see “Cautionary Note Regarding Forward

Looking Statements” on page 30, “Supervision and Regulation” on page 3, and “Item 1A. Risk

Factors” on page 12 of the attached Annual Report on Form 10-K for the year ended December

31, 2018 and recent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed

with the SEC, which are available on the SECs website at www.sec.gov.

Investor Information

Corporate Headquarters:
Farmers National Banc Corp.
20 South Broad Street, P.O. Box 555
Canfield, OH 44406
Phone 330-533-3341
Toll Free 1-888-988-3276
Website: www.farmersbankgroup.com

Dividend Payments: Subject to the approval of the
Board of Directors, quarterly cash dividends are
customarily payable on or about the 30th day of
March, June, September and December.

Transfer Agent: Computershare Investor Services
P.O. Box 30170, College Station, TX 77842

Dividend Reinvestment Plan (DRIP): Registered
shareholders can purchase additional common
shares through Farmers’ Dividend Reinvestment Plan.
Participation is voluntary and allows for automatic
reinvestment of cash dividends and the safekeeping
of share certificates. To obtain a prospectus, contact
the Computershare Investor Services at 877-581-5548.

Direct Deposit of Cash Dividends: The direct
deposit program, which is offered at no charge,
provides for automatic deposit of quarterly dividends
directly to a checking or savings account. For
information regarding this program, please contact
the Computershare Investor Services at 877-581-5548.

Annual Report on Form 10-K: A copy of the Annual
Report on Form 10-K filed with the Securities and
Exchange Commission will be available on the
Company’s website or hard copies will be provided
free of charge to any shareholder on request to the
attention of: Mr. Carl D. Culp, Farmers National
Banc Corp., 20 South Broad Street, P.O. Box 555,
Canfield, OH 44406.

Common Stock Listing and Information as to
Stock Prices and Dividends:
The Company’s common shares trade on the
NASDAQ Capital Market under the symbol FMNB.
Set forth in the accompanying table are per share
prices at which common shares have actually been
purchased and sold in transactions during the
periods indicated, to the knowledge of the Company.
Also included in the table are dividends per share
paid on the outstanding Company’s common shares
and any shares dividends paid. As of December 31,
2018, there were 27,791,901 shares outstanding and
3,366 shareholders of record of common shares.

The following graph compares the cumulative five year total return
to shareholders on Farmers National Banc Corp.’s common shares
relative to the cumulative total returns of the NASDAQ Composite
index, the NASDAQ Bank index and the SNL Microcap Bank
index. The graph assumes that the value of the investment in the
Company’s common shares and in each of the indexes (including
reinvestment of dividends) was $100 on 12/31/2013 and tracks
it through 12/31/2018.

F A R M E R S N A T I O N A L B A N C C O R P. | A N N U A L R E P O R T 2 0 1 8