FARMERS NATIONAL BANC CORP. 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 2007
Commission file number 0-12055
FARMERS NATIONAL BANC CORP.
(Exact name of registrant as specified in its charter)
     
OHIO   34-1371693
     
(State or other jurisdiction of   (I.R.S. Employer Identification No)
incorporation or organization)    
     
20 South Broad Street    
Canfield, OH 44406   44406
     
(Address of principal executive offices)   (Zip Code)
(330) 533-3341
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ       No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act.
Large accelerated filer o       Accelerated filer þ       Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o       No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at July 31, 2007
     
Common Stock, No Par Value   13,009,147 shares
 
 

 


 

PART I — FINANCIAL INFORMATION
         
    Page Number  
Item 1 Financial Statements
       
Included in Part I of this report:
       
Farmers National Banc Corp. and Subsidiary
       
    1  
    2  
    3  
    4-7  
    7-14  
    14  
    14  
 
       
       
    15  
    15  
    15  
    15  
    15  
    16  
    16  
    17  
10-Q Certifications
    18-19  
Section 906 Certifications
    20-21  
 EX-31.A
 EX-31.B
 EX-32.A
 EX-32.B

 


Table of Contents

CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
                 
    (In Thousands of Dollars)
    June 30,   December 31,
    2007   2006
     
ASSETS
               
Cash and due from banks
  $ 20,454     $ 24,447  
Federal funds sold
    1,030       9,591  
     
TOTAL CASH AND CASH EQUIVALENTS
    21,484       34,038  
     
 
               
Securities available for sale
    237,959       255,799  
 
               
Loans
    512,226       508,188  
Less allowance for loan losses
    5,593       5,594  
     
NET LOANS
    506,633       502,594  
     
 
               
Premises and equipment, net
    14,632       14,744  
Other assets
    15,148       14,409  
     
TOTAL ASSETS
  $ 795,856     $ 821,584  
     
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Deposits:
               
Noninterest-bearing
  $ 61,486     $ 66,003  
Interest-bearing
    526,840       553,744  
     
TOTAL DEPOSITS
    588,326       619,747  
     
 
               
Short-term borrowings
    73,525       77,792  
Long-term borrowings
    55,766       41,601  
Other liabilities
    4,497       6,221  
     
TOTAL LIABILITIES
    722,114       745,361  
     
 
               
Commitments and contingent liabilities
               
 
               
Stockholders’ Equity:
               
Common Stock — Authorized 25,000,000 shares; issued 14,736,615 in 2007 and 14,567,280 in 2006
    90,149       88,366  
Retained earnings
    8,777       9,617  
Accumulated other comprehensive income (loss)
    (2,714 )     (1,345 )
Treasury stock, at cost; 1,690,968 shares in 2007 and 1,494,525 in 2006
    (22,470 )     (20,415 )
     
TOTAL STOCKHOLDERS’ EQUITY
    73,742       76,223  
     
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 795,856     $ 821,584  
     
See accompanying notes

1


Table of Contents

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
                                 
    (In Thousands except Per Share Data)
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,   June 30,   June 30,
    2007   2006   2007   2006
         
INTEREST AND DIVIDEND INCOME
                               
Loans, including fees
  $ 8,665     $ 8,197     $ 17,030     $ 16,220  
Taxable securities
    1,774       1,884       3,626       3,758  
Tax exempt securities
    682       612       1,364       1,199  
Dividends
    141       168       285       278  
Federal funds sold
    70       165       98       207  
         
TOTAL INTEREST AND DIVIDEND INCOME
    11,332       11,026       22,403       21,662  
         
 
                               
INTEREST EXPENSE
                               
Deposits
    4,060       3,791       8,189       7,219  
Short-term borrowings
    706       668       1,353       1,191  
Long-term borrowings
    592       528       1,170       1,059  
         
TOTAL INTEREST EXPENSE
    5,358       4,987       10,712       9,469  
         
NET INTEREST INCOME
    5,974       6,039       11,691       12,193  
Provision for loan losses
    55       60       115       170  
         
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    5,919       5,979       11,576       12,023  
         
 
                               
NONINTEREST INCOME
                               
Service charges on deposit accounts
    721       759       1,401       1,442  
Security gains
    0       138       552       395  
Other operating income
    419       434       784       787  
         
TOTAL NONINTEREST INCOME
    1,140       1,331       2,737       2,624  
         
 
                               
NONINTEREST EXPENSES
                               
Salaries and employee benefits
    3,049       2,875       5,987       5,667  
Occupancy and equipment
    651       595       1,328       1,241  
State and local taxes
    226       225       453       450  
Professional fees
    146       113       293       260  
Loan expenses
    100       104       177       199  
Other operating expenses
    999       977       2,051       1,835  
         
TOTAL NONINTEREST EXPENSES
    5,171       4,889       10,289       9,652  
         
INCOME BEFORE INCOME TAXES
    1,888       2,421       4,024       4,995  
INCOME TAXES
    368       533       695       1,145  
         
NET INCOME
  $ 1,520     $ 1,888     $ 3,329     $ 3,850  
 
                               
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
                               
Change in net unrealized gains (losses) on securities, net of reclassifications
    (1,527 )     (2,165 )     (1,369 )     (2,169 )
         
COMPREHENSIVE INCOME (LOSS)
  ($ 7 )   ($ 277 )   $ 1,960   $ 1,681
         
 
                               
NET INCOME PER SHARE — basic and diluted
  $ 0.12     $ 0.15     $ 0.26     $ 0.30  
         
 
                               
DIVIDENDS PER SHARE
  $ 0.16     $ 0.16     $ 0.32     $ 0.32  
         
See accompanying notes

2


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
                 
    (In Thousands except Per Share Data)
    Six Months Ended
    June 30,   June 30,
    2007   2006
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 3,329     $ 3,850  
Adjustments to reconcile net income to net cash from operating activities:
               
Provision for loan losses
    115       170  
Depreciation and amortization
    537       514  
Net amortization of securities
    198       641  
Security gains
    (552 )     (395 )
Federal Home Loan Bank dividends
    0       (117 )
Net change in other assets and liabilities
    (1,849 )     540  
     
NET CASH FROM OPERATING ACTIVITIES
    1,778       5,203  
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from maturities and repayments of securities available for sale
    20,436       24,840  
Proceeds from sales of securities available for sale
    2,712       8,459  
Purchases of securities available for sale
    (7,060 )     (27,234 )
Loan originations and payments, net
    (4,154 )     556 )
Additions to premises and equipment
    (302 )     (273 )
     
NET CASH FROM INVESTING ACTIVITIES
    11,632       6,348  
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Net change in deposits
    (31,421 )     (12,205 )
Net change in short-term borrowings
    (4,267 )     1,094  
Proceeds from Federal Home Loan Bank borrowings and other debt
    20,000       10,000  
Repayment of Federal Home Loan Bank borrowings and other debt
    (5,835 )     (3,646 )
Repurchase of common stock
    (2,055 )     (1,957 )
Cash dividends paid
    (4,169 )     (4,096 )
Proceeds from dividend reinvestment
    1,783       1,897  
     
NET CASH FROM FINANCING ACTIVITIES
    (25,964 )     (8,913 )
     
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (12,554 )     2,638  
 
               
Beginning cash and cash equivalents
    34,038       31,614  
     
Ending cash and cash equivalents
  $ 21,484     $ 34,252  
     
 
               
Supplemental cash flow information:
               
Interest paid
  ($ 10,865 )   ($ 8,990 )
Income taxes paid
    (310 )     (1,085 )
See accompanying notes

3


Table of Contents

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation:
The consolidated financial statements include the accounts of the company and its wholly-owned subsidiary, The Farmers National Bank of Canfield. All significant intercompany balances and transactions have been eliminated.
Basis of Presentation:
The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2006 Annual Report to Shareholders included in the Company’s 2006 Annual Report on Form 10-K. The interim condensed consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.
Estimates:
To prepare financial statements in conformity with U.S. GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
The allowance for loan losses is particularly subject to change.
Segments:
The Company provides a broad range of financial services to individuals and companies in northeastern Ohio. While the Company’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

4


Table of Contents

Securities:
Securities available for sale at June 30, 2007 and December 31, 2006 are summarized as follows:
                         
            Gross   Gross
(In Thousands of Dollars)           Unrealized   Unrealized
June 30, 2007   Fair Value   Gains   Losses
     
U.S. Treasury and U.S. Government sponsored enterprises
  $ 71,747     $ 15     $ (820 )
Mortgage-backed securities
    92,880       50       (2,836 )
Obligations of states and political subdivisions
    68,416       33       (1,630 )
     
Total debt securities
    233,043       98       (5,286 )
Equity securities
    4,916       1,013       0  
     
TOTALS
  $ 237,959     $ 1,111     $ (5,286 )
     
                         
            Gross   Gross
(In Thousands of Dollars)           Unrealized   Unrealized
December 31, 2006   Fair Value   Gains   Losses
     
U.S. Treasury and U.S. Government sponsored enterprises
  $ 75,931     $ 105     $ (843 )
Corporate debt securities
    1,000       0       (1 )
Mortgage-backed securities
    102,586       72       (2,610 )
Obligations of states and political subdivisions
    68,967       296       (345 )
     
Total debt securities
    248,484       473       (3,799 )
Equity securities
    7,315       1,257       0  
     
TOTALS
  $ 255,799     $ 1,730     $ (3,799 )
     
Unrealized losses on debt securities issued by the U.S. Treasury, U.S. Government agencies, or U.S. Government sponsored enterprises and obligations of state and political subdivisions have not been recognized into income because the securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future and the decline in fair value is largely due to increases in market interest rates. The fair value is expected to recover as the securities approach their maturity date. Unrealized losses on mortgage-backed securities have not been recognized into income because these securities are backed by performing assets, timely repayment of principal and interest on these securities is guaranteed by the issuer, and because management has the intent and ability to hold these securities for the foreseeable future. The fair value of these securities is expected to recover as principal payments are received.

5


Table of Contents

Earnings Per Share:
The computation of basic and diluted earnings per share is shown in the following table:
                                 
    Three months ended     Six months ended  
(Dollars in Thousands, except   June 30,     June 30,  
Per Share Data)   2007     2006     2007     2006  
Basic EPS computation
                               
Numerator – Net income
  $ 1,520     $ 1,888     $ 3,329     $ 3,850  
Denominator – Weighted average shares outstanding
    13,039,436       12,974,678       13,044,026       12,979,980  
Basic earnings per share
  $ .12     $ .15     $ .26     $ .30  
 
                       
 
                               
Diluted EPS computation
                               
Numerator – Net income
  $ 1,520     $ 1,888     $ 3,329     $ 3,850  
Denominator – Weighted average shares outstanding for basic earnings per share
    13,039,436       12,974,678       13,044,026       12,979,980  
Effect of Stock Options
    0       219       0       3,967  
 
                       
Weighted averages shares for diluted earnings per share
    13,039,436       12,974,897       13,044,026       12,983,947  
 
                       
Diluted earnings per share
  $ .12     $ .15     $ .26     $ .30  
 
                       
For the three-month and six-month periods ended June 30, 2007, 48,000 potential common shares were not considered in the dilutive earnings per share calculation because they were not dilutive.
Comprehensive Income:
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists solely of the change in unrealized gains and losses on securities available for sale, net of reclassification for gains recognized in income.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at June 30, 2007.
In September 2006, the FASB EITF finalized Issue No. 06-5, Accounting for Purchases of Life
Insurance — Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4
(Accounting for Purchases of Life Insurance). EITF Issue No. 06-5 requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, EITF Issue No. 06-5 discusses whether the cash surrender value should be

6


Table of Contents

discounted when the policyholder is contractually limited in its ability to surrender a policy. EITF Issue No. 06-5 was effective January 1, 2007 and the adoption of this standard did not have a material impact on the financial statements.
Newly Issued But Not Yet Effective Accounting Standards
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this standard.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company has not completed its evaluation of the impact of adoption of EITF 06-4.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 gives entities the option to measure eligible financial assets and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be reported in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management does not expect that the adoption of this standard on January 1, 2008 will have a material impact on the Corporation’s financial statements.
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
When used in this Form 10-Q, or in future filings with the Securities and Exchange Commission, in press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the Corporation’s actual results to be materially different from those indicated. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the market areas the Corporation conducts business, which could materially impact credit quality trends, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the market areas the Corporation conducts business, and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Corporation undertakes no obligation to publicly release the result of any revisions that may be made to any forward-looking

7


Table of Contents

statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Results of Operations
Overview:
Comparison of selected financial ratios and other results for the three-month and six-month periods ended June 30, 2007 and 2006:
                                 
    Three months ended   Six months ended
    June 30,   June 30,
(Dollars in Thousands, except Per Share Data)   2007   2006   2007   2006
Total Assets
  $ 795,856     $ 820,206     $ 795,856     $ 820,206  
Net Income
  $ 1,520     $ 1,888     $ 3,329     $ 3,850  
Basic and Diluted Earnings per share
  $ .12     $ .15     $ .26     $ .30  
Return on Average Assets (annualized)
    .76 %     .92 %     .83 %     .94 %
Return on Average Equity (annualized)
    8.12 %     10.22 %     8.91 %     10.33 %
Efficiency Ratio (tax equivalent basis)
    68.40 %     63.58 %     69.64 %     63.10 %
Capital to Asset Ratio
    9.27 %     8.94 %     9.27 %     8.94 %
Dividends to Net Income
    137.04 %     109.85 %     125.23 %     107.66 %
Loans to Assets
    64.36 %     62.26 %     64.36 %     62.26 %
Net Loans to Deposits
    86.11 %     81.60 %     86.11 %     81.60 %
The Corporation’s earnings performance in the second quarter remains slightly below projections for 2007. Earlier this year, some strategic decisions were made to monitor growth and net margin issues relative to performance. Given the modest loan demand and the keen competition for time deposits, efforts have been concentrated to better manage the margin rather than grow the balance sheet in the current interest rate environment. Taking into consideration that there was a slight movement in the shape of the yield curve and internal pricing adjustments on our deposit products, the Corporation has seen favorable movement in the net interest margin during the past ninety days. In addition, the Corporation is focused on improving operating processes to be more efficient in order to improve the non-interest income stream and control non-interest expenses.
Net Interest Income. The following schedules detail the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

8


Table of Contents

Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
                                                 
    Three Months Ended     Three Months Ended  
    June 30, 2007     June 30, 2006  
    AVERAGE                     AVERAGE              
    BALANCE     INTEREST     RATE (1)     BALANCE     INTEREST     RATE (1)  
         
EARNING ASSETS
                                               
Loans (3) (4) (5)
  $ 506,202     $ 8,755       6.94 %   $ 507,840     $ 8,293       6.55 %
Taxable securities
    171,710       1,774       4.14       190,622       1,884       3.96  
Tax-exempt securities (5)
    69,944       1,016       5.83       61,319       942       6.16  
Equity Securities (2) (5)
    9,046       163       7.23       11,058       201       7.29  
Federal funds sold
    5,330       70       5.27       13,471       165       4.91  
Total earning assets
    762,232       11,778       6.20       784,310       11,485       5.87  
 
                                               
NONEARNING ASSETS
                                               
 
                                               
Cash and due from banks
    22,035                       24,941                  
Premises and equipment
    14,667                       14,914                  
Allowance for Loan Losses
    (5,596 )                     (5,890 )                
Other assets (3)
    9,516                       7,695                  
         
Total Assets
  $ 802,853                     $ 825,970                  
         
 
                                               
INTEREST-BEARING LIABILITIES
                                               
 
                                               
Time deposits
  $ 266,744     $ 3,102       4.66 %   $ 277,883     $ 2,807       4.05 %
Savings deposits
    168,075       815       1.94       167,353       754       1.81  
Demand deposits
    98,325       143       0.58       115,963       230       0.80  
Repurchase agreements
    78,714       698       3.56       80,464       661       3.29  
Borrowings
    51,036       600       4.72       47,138       536       4.56  
         
Total Interest-Bearing Liabilities
    662,894       5,358       3.24       688,801       4,988       2.90  
 
                                               
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
 
                                               
Demand deposits
    59,192                       57,719                  
Other Liabilities
    5,649                       5,359                  
Stockholders’ equity
    75,118                       74,091                  
         
Total Liabilities and Stockholders’ Equity
  $ 802,853                     $ 825,970                  
         
 
                                               
Net interest income and interest rate spread
          $ 6,420       2.96 %           $ 6,497       2.97 %
         
 
                                               
Net interest margin
                    3.38 %                     3.32 %
 
(1)   Rates are calculated on an annualized basis.
 
(2)   Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.
 
(3)   Non-accrual loans and overdraft deposits are included in other assets.
 
(4)   Interest on loans includes fee income of $463 and $420 for 2007 and 2006 respectively.
 
(5)   For 2007, adjustments of $89 thousand, $335 thousand, and $21 thousand respectively are made to tax equate income on tax exempt loans, tax exempt securities and to reflect a dividends received deduction on equity securities. For 2006, adjustments of $84 thousand, $288 thousand, and $33 thousand respectively are made to tax equate income on tax exempt loans, tax exempt securities and to reflect a dividends received deduction on equity securities. These adjustments are based on a marginal federal income tax rate of 35%, less disallowances.

9


Table of Contents

Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)
                                                 
    Six Months Ended   Six Months Ended
    June 30, 2007   June 30, 2006
    AVERAGE                   AVERAGE        
    BALANCE   INTEREST   RATE (1)   BALANCE   INTEREST   RATE (1)
         
EARNING ASSETS
                                               
Loans (3) (4) (5)
  $ 505,321     $ 17,209       6.87 %   $ 508,985     $ 16,404       6.50 %
Taxable securities
    174,854       3,626       4.18       190,977       3,758       3.97  
Tax-exempt securities (5)
    69,962       2,042       5.89       60,367       1,845       6.16  
Equity Securities (2) (5)
    9,677       327       6.81       11,712       323       5.56  
Federal funds sold
    3,737       98       5.29       8,658       207       4.82  
         
Total earning assets
    763,551       23,302       6.15       780,699       22,537       5.82  
 
                                               
NONEARNING ASSETS
                                               
 
                                               
Cash and due from banks
    22,224                       25,206                  
Premises and equipment
    14,689                       14,990                  
Allowance for Loan Losses
    (5,590 )                     (5,887 )                
Other assets (3)
    9,615                       7,954                  
         
Total Assets
  $ 804,489                     $ 822,962                  
         
 
                                               
INTEREST-BEARING LIABILITIES
                                               
 
                                               
Time deposits
  $ 269,902     $ 6,177       4.62 %   $ 281,977     $ 5,448       3.90 %
Savings deposits
    171,643       1,730       2.03       160,844       1,273       1.60  
Demand deposits
    98,140       282       0.58       120,121       498       0.84  
Repurchase agreements
    74,443       1,323       3.58       74,626       1,168       3.16  
Borrowings
    50,570       1,200       4.79       47,977       1,083       4.55  
         
Total Interest-Bearing Liabilities
    664,698       10,712       3.25       685,545       9,470       2.79  
 
                                               
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
                                               
 
                                               
Demand deposits
    58,929                       57,003                  
Other Liabilities
    5,486                       5,247                  
Stockholders’ equity
    75,376                       75,167                  
         
Total Liabilities and Stockholders’ Equity
  $ 804,489                     $ 822,962                  
         
 
                                               
Net interest income and interest rate spread
          $ 12,590       2.90 %           $ 13,067       3.03 %
         
 
                                               
Net interest margin
                    3.33 %                     3.38 %
 
(1)   Rates are calculated on an annualized basis.
 
(2)   Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.
 
(3)   Non-accrual loans and overdraft deposits are included in other assets.
 
(4)   Interest on loans includes fee income of $867 and $843 for 2007 and 2006 respectively.
 
(5)   For 2007, adjustments of $178 thousand, $679 thousand, and $41 thousand respectively are made to tax equate income on tax exempt loans, tax exempt securities and to reflect a dividends received deduction on equity securities. For 2006, adjustments of $172 thousand, $604 thousand, and $45 thousand respectively are made to tax equate income on tax exempt loans, tax exempt securities and to reflect a dividends received deduction on equity securities. These adjustments are based on a marginal federal income tax rate of 35%, less disallowances.

10


Table of Contents

Taxable equivalent net interest income. Taxable equivalent net interest income for the first six-months ended June 30, 2007 totaled $12.59 million, a decrease of $477 thousand or 3.65% compared to the first six-months of 2006. Although the yield on earning assets increased by 33 basis points over the past 12 months, this benefit was offset by a 46 basis point increase in the cost of interest-bearing liabilities. The decline in the net interest margin and net interest income continues to be affected by the shape of the yield curve and aggressive competitive pricing in our market areas, which has caused the yield on average earning assets to lag behind the increasing cost of interest-bearing liabilities. Average savings deposits increased by $10.80 million or 6.71% over the prior year six month period, which along with the increased interest rate paid on deposits, helped drive up interest expense on savings deposits by $457 thousand. The interest expense related to time deposits and repurchase agreements increased 13.38% over the prior year comparable period, which is consistent with the market increase in short-term interest rates.
Taxable equivalent net interest income for the quarter ended June 30, 2007 totaled $6.42 million, a slight decrease of $77 thousand or 1.19% compared to the quarter ended June 30, 2006. The increase in interest expense is attributable to the 34 basis point increase in the cost of interest-bearing liabilities. Average interest-bearing demand deposits decreased by $17.64 million or 15.21% over the prior year comparable quarter which helped lower interest expense on demand deposits by $87 thousand.
Noninterest Income. Total noninterest income for the six-month period ended June 30, 2007 increased by $113 thousand or 4.31% compared to the same period in 2006. This increase is due to a $157 thousand increase in gains on the sale of investment securities.
Total noninterest income for the quarter ended June 30, 2007 decreased by $191 thousand from the prior year comparable quarter. This decrease is mainly due to a $138 thousand decrease in gains on the sale of investment securities.
Noninterest Expense. Noninterest expense was $10.29 million for the first six months of 2007 compared to $9.65 million for the same period in 2006. This amounts to an increase of 6.60%. Most of this increase is the result of a $320 thousand increase in salaries and employee benefits mainly attributable to higher health insurance costs.
Noninterest expense was $5.17 million for the quarter ended June 30, 2007 compared to $4.89 million for the same quarter in 2006. Again, this increase is due to the $174 thousand increase in salaries and employee benefits which can be attributed to higher health insurance costs.
The efficiency ratio increased to 69.64% for the first six months of 2007 compared to 63.10% for the first six months of 2006. The efficiency ratio was adversely impacted by the $502 thousand decline in net interest income. The efficiency ratio is calculated as follows: non-interest expense divided by the sum of fully taxable equivalent net interest income plus non-interest income, excluding security gains. This ratio is a measure of the expense incurred to generate a dollar of revenue. Management will continue to closely monitor the efficiency ratio.
Income Taxes. Income tax expense totaled $695 thousand for the first six months of 2007 and $1.15 million for the first six months of 2006, a decrease of $450 thousand or 39.30%. The effective tax rate for the first six months of 2007 was 17.27% compared to 22.92% for the same time in 2006. Income tax expense totaled $368 thousand for the quarter ended June 30, 2007 and $533 thousand for the quarter ended June 30, 2006, a decrease of 30.96%. The current periods’ expense was impacted by the Corporation’s increased purchases of tax-exempt municipal securities and a decrease in pretax income resulted in the lower tax rate.

11


Table of Contents

Other Comprehensive Income. For the first six months of 2007, the change in net unrealized gains on securities, net of reclassifications, resulted in an unrealized loss of $1.37 million compared to an unrealized loss of $2.17 million for the same period in 2006. The second quarter also had an unrealized loss of $1.53 million compared to an unrealized loss of $2.17 million for the same quarter in 2006. The fair value of these securities is expected to recover as principal payments are received and they approach their maturity date. Management has the intent and ability to hold these securities for the foreseeable future and the decline in fair value is largely due to increases in market interest rates.
Financial Condition
Total assets decreased $25.73 million or 3.13% since December 31, 2006, as the Corporation also saw a decline in deposit balances. Capital ratios remain solid, as shown by the ratio of equity to total assets at June 30, 2007 of 9.27%.
Securities. Securities available for sale decreased $17.84 million. Matured securities were used to partially fund the decrease of $31.42 million in deposits. The Corporation sold $2.7 million in market value of FNMA preferred stock, resulting in a gain of $552 thousand. In addition, there was a $2.11 million decrease in the net unrealized gains (losses) on securities.
Loans. Gross loans increased $4.04 million since December 31, 2006. Commercial Real Estate loans grew $10.57 million or 5.84% since December 31, 2006. The growth in commercial real estate loans offset the decline in balance in indirect installment loans, which decreased $6.59 million or 6.48%. Commercial Real Estate loans have grown as the Corporation has used a combination of experienced personnel and marketing strategies to build this section of the portfolio as the local economy continues to recover. On a fully tax equivalent basis, loans contributed 73.85% of total interest income for the six months ended June 30, 2007 and 72.79% for the six months ended June 30, 2006.
Allowance for Loan Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis.
Asset Quality History
(In Thousands of Dollars)
                                         
    6/30/07   3/31/07   12/31/06   9/30/06   6/30/06
Nonperforming loans
  $ 2,567     $ 2,458     $ 1,722     $ 1,853     $ 1,884  
 
Nonperforming loans as a % of total loans
    .50 %     .48 %     .34 %     .36 %     .37 %
 
Allowance for loan losses
  $ 5,593     $ 5,556     $ 5,594     $ 5,845     $ 5,848  
 
Allowance for loan losses as a % of loans
    1.09 %     1.10 %     1.10 %     1.14 %     1.15 %
 
Allowance for loan losses as a % of nonperforming loans
    217.88 %     226.04 %     324.85 %     315.39 %     310.33 %
The allowance for loan losses as a percentage of loans at June 30, 2007 was slightly down from the December 31, 2006 amount of 1.10%. The provision for loan losses for the first six months of 2007 and 2006 was $115 thousand and $170 thousand, respectively. Net charge-offs totaled $116 thousand for the first six months of 2007 down from $182 thousand for the first six months of 2006. The provision closely tracks net charge-offs. During 2007 approximately 64% of gross charge-offs have occurred in the indirect loan portfolio compared to 84% in 2006. Non-performing loans to total

12


Table of Contents

loans have increased from .34% as of December 31, 2006 to .50% as of June 30, 2007. The ratio of the allowance for loan losses (ALLL) to non-performing loans was 218%.
The provision for loan losses is based on management’s judgment after taking into consideration all factors connected with the collectibility of the existing loan portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and volume of the loan portfolio, industry standards and other relevant factors. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.
Deposits. Total deposits decreased $31.42 million since December 31, 2006. Balances in the Corporation’s time deposits decreased $15.26 million or 5.44% between December 31, 2006 and June 30, 2007. Money market accounts decreased $8.07 million since December 31, 2006. Given the modest loan demand and the keen competition for time deposits, efforts have been concentrated to better manage the margin rather than grow the balance sheet in the current interest rate environment. The Company prices deposit rates to remain competitive within the market and to retain customers.
Borrowings. Total borrowings increased $9.90 million or 8.29% since December 31, 2006. The Corporation partially offset the drop in deposits with an increase in securities sold under repurchase agreements, which grew $5.81 million during the six-month period.
Capital Resources. Total stockholders’ equity decreased from $76.22 million at December 31, 2006 to $73.74 million at June 30, 2007. During the first six months of 2007, the mark to market adjustment of securities decreased accumulated other comprehensive income by $1.37 million and the repurchase of treasury stock decreased stockholders’ equity by $2.06 million.
The capital management function is a regular process, which consists of providing capital for both the current financial position and the anticipated future growth of the Corporation. As of June 30, 2007 the Corporation’s total risk-based capital ratio stood at 15.26%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 14.12% and 9.26%, respectively. Management believes, as of June 30, 2007, that the Corporation and Bank meet all capital adequacy requirements to which they are subject.
Critical Accounting Policies
The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note A to the consolidated audited financial statements in Farmers National Banc Corp.’s 2006 Annual Report to Shareholders included in Farmers National Banc Corp.’s Annual Report on Form 10-K. 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 two accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand our financial statements. These policies relate to determining the adequacy of the allowance for loan losses and other-than-temporary impairment of securities. Additional information regarding these policies is included in the notes to the aforementioned 2006 consolidated financial statements, Note A (Summary of Significant Accounting Policies), Note B (Securities), Note C (Loans), and the sections captioned “Loan Portfolio” and “Investment Securities”.
Liquidity

13


Table of Contents

The Corporation maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Corporation depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Corporation’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash and due from banks, as well as cash flows from maturities and repayments of loans, and securities.
The primary investing activities of the Company are originating loans and purchasing securities. During the first six months of 2007, net cash from investing activities amounted to $11.63 million compared to $6.35 million provided by investing activities for the same period in 2006. Purchases of securities available for sale amounted to $7.06 million in 2007 compared to $27.23 million in 2006. Net loans increased by $4.15 million during this year’s first six-month period and decreased $556 thousand over the same six-month period in 2006.
The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash used by financing activities amounted to $25.96 million for the first six months of 2007 compared to $8.91 million used by financing activities for the same period in 2006. Most of this change is a result of the net decrease in deposits. Deposits decreased $31.42 million for the six-month period ended June 30, 2007 compared to a $12.21 million decrease for the same period in 2006. The variability in deposits is a result of normal customer deposit activity. Proceeds from Federal Home Loan Bank borrowings amounted to $20 million in 2007 compared to $10 million in 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company.
The Company monitors its exposure to interest rate risk on a quarterly basis through simulation analysis which measures the impact changes in interest rates can have on net income. The simulation technique analyzes the effect of a presumed 100 and 200 basis points shift in interest rates and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, non-maturity deposit assumptions and capital requirements. The results of the simulation indicate that in an environment where interest rates rise or fall 100 and 200 basis points over a 12 month period, using June 30, 2007 amounts as a base case, the Company’s change in net interest income would be within the board mandated limits.
The information required by Item 3 has been disclosed in Item 7A of the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2006. There has been no material change in the disclosure regarding market risk due to the stability of the balance sheet.
Item 4. Controls and Procedures
Based on their evaluation, as of the end of the period covered by this quarterly report, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There have been no significant changes in internal controls or in other

14


Table of Contents

factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. The Company’s Chief Executive Officer and Chief Financial Officer have also concluded there have been no changes over the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, Farmers National Bank was named a defendant in a lawsuit filed in September 2005, at which time, the Plaintiff alleges that the Bank is indebted to the Plaintiff for allowing the Plaintiff’s former agent to make withdrawals from the Plaintiff’s account. The Plaintiff is seeking damages in excess of $423,000 to be determined by a jury trial. While there is no way to determine the ultimate success of defense of the lawsuit at this time, the Bank is defending this matter vigorously.
Item 1A. Risk Factors
For information regarding factors that could affect the Corporation’s results of operations, financial condition and liquidity, see the risk factors discussion provided under Part 1, Item 1A on Form 10-K for the fiscal year ended December 31, 2006. See also, “Forward-Looking Statements” included in Part 1, Item 2 of this Quarterly Report on Form 10-Q. There have been no material changes in risk factors since December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of equity securities by the issuer.
On June 12, 2007, the Corporation announced the adoption of a stock repurchase program that authorizes the repurchase of up to 4.9% or approximately 638 thousand shares of its outstanding common stock in the open market or in privately negotiated transactions. This program expires in June 2008.
The following table summarizes the treasury stock purchased by the issuer during the second quarter of 2007:
                                 
                    Total Number of   Maximum Number of
                    Shares Purchased as   Shares that May Yet
    Total Number of   Average Price   Part of Publicly   Be Purchased Under
Period   Shares Purchased   Paid Per Share   Announced Program   the Program
April 1-30
    7,525     $ 10.62       7,525       397,034  
May 1-31
    47,104     $ 10.15       47,104       349,930  
June 1-30
    56,294     $ 10.53       56,294       581,706  
TOTAL
    110,923     $ 10.38       110,923       581,706  
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders

15


Table of Contents

Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
(a) The following exhibits are filed or incorporated by reference as part of this report:
2. Not applicable.
3(i). The Articles of Incorporation, including amendments thereto for the Registrant. Incorporated by reference to Exhibit 4.1 to Farmers National Banc Corp’s Form S-3 Registration Statement dated October 3, 2001. (File No. 0-12055).
3(ii). The Code of Regulations, including amendments thereto for the Registrant. Incorporated by reference to Exhibit 4.2 to Farmers National Banc Corp’s Form S-3 Registration Statement dated October 3, 2001. (File No. 0-12055).
4.   Incorporated by reference to initial filing.
 
10.   Not applicable.
 
11.   Refer to notes to unaudited consolidated financial statements.
 
15.   Not applicable.
 
18.   Not applicable.
 
19.   Not applicable.
 
22.   Not applicable.
 
23.   Not applicable.
 
24.   Not applicable.
31.a Certification of Chief Executive Officer (Filed herewith)
31.b Certification of Chief Financial Officer (Filed herewith)
32.a 906 Certification of Chief Executive Officer (Filed herewith)
32.b 906 Certification of Chief Financial Officer (Filed herewith)

16


Table of Contents

     SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
                              FARMERS NATIONAL BANC CORP.
Dated: August 8, 2007
/s/Frank L. Paden
Frank L. Paden
President and Secretary
Dated: August 8, 2007
/s/Carl D. Culp
Carl D. Culp
Executive Vice President
and Treasurer

17