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

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

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

(330) 533-3341

Not applicable

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company 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 October 31, 2009
Common Stock, No Par Value		13,463,218 shares

 

 

		Page Number
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Included in Part I of this report:
Farmers National Banc Corp. and Subsidiaries
Consolidated Balance Sheets			1
Consolidated Statements of Income and Comprehensive Income			2
Consolidated Statements of Cash Flows			3
Notes to Unaudited Consolidated Financial Statements			4-14
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			15-23
Item 3 Quantitative and Qualitative Disclosures About Market Risk			24
Item 4 Controls and Procedures			24
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			25
Item 1A Risk Factors			25
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3 Defaults Upon Senior Securities			26
Item 4 Submission of Matters to a Vote of Security Holders			26
Item 5 Other Information			26
Item 6 Exhibits			26
SIGNATURES			28
Exhibit 31.a
Exhibit 31.b
Exhibit 32.a
Exhibit 32.b

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

		(In Thousands of Dollars)
		September 30,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	23,282			$	23,803
Federal funds sold			21,870				246
TOTAL CASH AND CASH EQUIVALENTS			45,152				24,049
Securities available for sale			320,781				271,605
Loans			612,052				552,005
Less allowance for loan losses			7,210				5,553
NET LOANS			604,842				546,452
Premises and equipment, net			14,363				14,139
Bank owned life insurance			11,404				11,021
Goodwill			3,679				0
Other intangibles			3,942				0
Other assets			11,888				13,104
TOTAL ASSETS		$	1,016,051			$	880,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	62,610			$	61,499
Interest-bearing			681,289				586,511
TOTAL DEPOSITS			743,899				648,010
Short-term borrowings			142,999				105,435
Long-term borrowings			43,273				46,464
Other liabilities			3,621				3,359
TOTAL LIABILITIES			933,792				803,268
Commitments and contingent liabilities
Stockholders’ Equity:
Common Stock — Authorized 25,000,000 shares; issued 15,516,301 in 2009 and 15,283,520 in 2008			95,405				94,217
Retained earnings			7,001				6,096
Accumulated other comprehensive income (loss)			5,356				2,292
Treasury stock, at cost; 2,053,083 shares in 2009 and 2,053,058 in 2008			(25,503	)			(25,503	)
TOTAL STOCKHOLDERS’ EQUITY			82,259				77,102
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,016,051			$	880,370

See accompanying notes

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Unaudited)

		(In Thousands except Per Share Data)
		For the Three Months Ended								For the Nine Months Ended
		Sept 30,				Sept 30,				Sept 30,				Sept 30,
		2009				2008				2009				2008
INTEREST AND DIVIDEND INCOME
Loans, including fees		$	9,610			$	8,839			$	28,003			$	25,981
Taxable securities			2,336				2,131				6,916				5,663
Tax exempt securities			632				667				1,831				2,070
Dividends			60				88				197				317
Federal funds sold			11				83				25				322
TOTAL INTEREST AND DIVIDEND INCOME			12,649				11,808				36,972				34,353
INTEREST EXPENSE
Deposits			3,218				3,859				9,640				12,026
Short-term borrowings			463				512				1,435				1,497
Long-term borrowings			497				551				1,515				1,717
TOTAL INTEREST EXPENSE			4,178				4,922				12,590				15,240
NET INTEREST INCOME			8,471				6,886				24,382				19,113
Provision for loan losses			1,550				350				3,050				560
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			6,921				6,536				21,332				18,553
NONINTEREST INCOME
Service charges on deposit accounts			768				724				2,020				2,011
Bank owned life insurance income			127				132				383				397
Trust income			1,248				0				2,251				0
Insurance agency commissions			38				0				38				0
Security gains			(2	)			329				507				523
Impairment of equity securities			0				(1,844	)			(74	)			(2,395	)
Other operating income			430				410				1,245				1,254
TOTAL NONINTEREST INCOME			2,609				(249	)			6,370				1,790
NONINTEREST EXPENSES
Salaries and employee benefits			4,204				2,907				11,302				8,520
Occupancy and equipment			857				725				2,524				2,179
State and local taxes			238				201				689				617
Professional fees			252				197				695				484
Advertising			153				156				408				379
FDIC insurance			312				45				1,240				79
Merger related costs			0				0				453				0
Intangible amortization			150				0				298				0
Other operating expenses			1,509				1,038				4,125				3,112
TOTAL NONINTEREST EXPENSES			7,675				5,269				21,734				15,370
INCOME BEFORE INCOME TAXES			1,855				1,018				5,968				4,973
INCOME TAXES			299				19				1,071				716
NET INCOME		$	1,556			$	999			$	4,897			$	4,257
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in net unrealized gains (losses) on securities, net of reclassifications			3,216				140				3,064				(1,025	)
COMPREHENSIVE INCOME (LOSS)		$	4,772			$	1,139			$	7,961			$	3,232
NET INCOME PER SHARE — basic and diluted		$	0.12			$	0.08			$	0.37			$	0.33
DIVIDENDS PER SHARE		$	0.06			$	0.12			$	0.30			$	0.40

See accompanying notes

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES
(Unaudited)

		(In Thousands except Per Share Data)
		Nine Months Ended
		Sept 30,				Sept 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	4,897			$	4,257
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses			3,050				560
Depreciation and amortization			1,092				801
Net amortization of securities			306				202
Security gains			(507	)			(523	)
Loss on sale of other real estate owned			41				45
Impairment of securities			74				2,395
Federal Home Loan Bank dividends			0				(176	)
Increase in bank owned life insurance			(383	)			(397	)
Net change in other assets and liabilities			(918	)			(1,702	)
NET CASH FROM OPERATING ACTIVITIES			7,652				5,462
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of securities available for sale			54,290				48,795
Proceeds from sales of securities available for sale			9,778				30,997
Purchases of securities available for sale			(106,334	)			(137,665	)
Proceeds from sale of Federal Home Loan Bank stock			1,414				0
Purchase of trust entity, net			(10,511	)			0
Loan originations and payments, net			(61,984	)			(16,528	)
Proceeds from sale of other real estate owned			239				68
Additions to premises and equipment			(899	)			(463	)
NET CASH FROM INVESTING ACTIVITIES			(114,007	)			(74,796	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			95,889				56,429
Net change in short-term borrowings			37,564				23,410
Proceeds from Federal Home Loan Bank borrowings and other debt			0				5,000
Repayment of Federal Home Loan Bank borrowings and other debt			(3,191	)			(10,226	)
Repurchase of common stock			0				(635	)
Cash dividends paid			(3,992	)			(5,226	)
Proceeds from dividend reinvestment			1,188				2,006
NET CASH FROM FINANCING ACTIVITIES			127,458				70,758
NET CHANGE IN CASH AND CASH EQUIVALENTS			21,103				1,424
Beginning cash and cash equivalents			24,049				31,105
Ending cash and cash equivalents		$	45,152			$	32,529
Supplemental cash flow information:
Interest paid		$	12,624			$	15,498
Income taxes paid		$	1,885			$	1,045
Supplemental noncash disclosures:
Transfer of loans to other real estate		$	544			$	158

Farmers National Banc Corp acquired all of the stock of Butler Wick Trust Company for $12.13 million on March 31, 2009. The assets acquired and liabilities assumed are itemized in the Acquisition footnote on page 10 of this report.

See accompanying notes

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, The Farmers National Bank of Canfield, Farmers Trust Company and Farmers National Insurance. All significant intercompany balances and transactions have been eliminated in the consolidation.

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 2008 Annual Report to Shareholders included in the Company’s 2008 Annual Report on Form 10-K. The interim 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. Management has evaluated events occurring subsequent to the balance sheet date through November 9, 2009 (the final statement issuance date), determining no events require adjustment to or additional disclosure in the consolidated financial statements. 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, which are all financial in nature. The Corporation’s operations are considered by management to be aggregated in one reportable operating segment.

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at September 30, 2009 and December 31, 2008 and the corresponding amounts of unrealized gains and losses:

		Amortized				Unrealized				Unrealized				Fair
(In Thousands of Dollars)		Cost				Gains				Losses				Value
September 30, 2009
U.S. government-sponsored entities		$	95,816			$	1,720			$	(292	)		$	97,244
States and political subdivisions			65,118				2,192				(226	)			67,084
Mortgage-backed securities — residential			150,860				4,632				(45	)			155,447
Collateralized mortgage obligations			349				7				0				356
Equity securities			149				253				(16	)			386
Other securities			250				14				0				264
Totals		$	312,542			$	8,818			$	(579	)		$	320,781

(In Thousands of Dollars)
December 31, 2008
U.S. government-sponsored entities		$	42,611			$	2,089			$	(19	)		$	44,681
States and political subdivisions			61,749				536				(1,379	)			60,906
Mortgage-backed securities			163,497				2,722				(397	)			165,822
Equity securities			222				34				(60	)			196
Totals		$	268,079			$	5,381			$	(1,855	)		$	271,605

The amortized cost and fair value of the debt securities portfolio are shown by contractual maturity. Mortgage-backed and CMO securities are not due at a single maturity date and are shown separately.

		September 30, 2009
		Amortized				Fair
(In Thousands of Dollars)		Cost				Value
Maturity
Within one year		$	2,602			$	2,627
One to five years			80,343				81,665
Five to ten years			45,517				46,747
Beyond ten years			32,474				33,291
Mortgage-backed and CMO securities			151,457				156,065
Total		$	312,393			$	320,395

The following table summarizes the investment securities with unrealized losses at September 30, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In Thousands of Dollars)		Value				Losses				Value				Losses				Value				Losses
September 30, 2009
Available-for-sale U.S. government- sponsored entities		$	32,101			$	(283	)		$	370			$	(9	)		$	32,471			$	(292	)
States and political subdivisions			1,836				(38	)			3,130				(188	)			4,966				(226	)
Mortgage-backed securities – residential			15,403				(39	)			718				(6	)			16,121				(45	)
Equity securities			0				0				23				(16	)			23				(16	)
Total		$	49,340			$	(360	)		$	4,241			$	(219	)		$	53,581			$	(579	)

Proceeds from sales of securities were $9.78 million and $31.00 million for the nine months ended September 30, 2009 and 2008, respectively. Gross gains of $509 thousand and $523 thousand were realized on these sales during 2009 and 2008, respectively. A gross loss of $2 thousand was recognized during the first nine months ending September 30, 2009.

Proceeds from security sales were $250 thousand with an associated $2 thousand loss on sales during the three-month period ended September 30, 2009. Proceeds from sales of securities were $24.58 million for the three months ended September 30, 2008. Gross gains of $329 thousand were realized on these sales during the third quarter of 2008.

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320, Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Corporation recorded an other-than-temporary pre-tax charge for impairment against the Company’s common stock issued by regional companies in the amount of $74 thousand, with a related tax benefit of $25 thousand during the nine months ended September 30, 2009.

The Corporation also recorded an other-than-temporary impairment charge against holdings of Fannie Mae Preferred Stock in the amount of $2.40 million with a related tax benefit of $814 thousand during the nine months ended September 30, 2008.

As of September 30, 2009, the Company’s security portfolio consisted of 451 securities, 78 of which were in an unrealized loss position. The majority of the unrealized losses on the Corporation’s securities are related to its holdings of U.S. Government-sponsored entities, as discussed below.

Unrealized losses on debt securities issued by the U.S. Government-sponsored entities 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 fluctuations in market interest rates. The fair value is expected to recover as the securities approach their maturity date.

Unrealized losses on debt securities at September 30, 2009 on the Corporation’s obligations of states and political subdivisions have not been recognized into income because the securities are of high credit quality and management has the intent and ability to hold these until they recover their underlying value which may be at maturity.

Loans:

Loan balances were as follows:

		September 30,				December 31,
(In Thousands of Dollars)		2009				2008
Residential real estate		$	178,979			$	173,246
Commercial real estate			214,641				195,244
Consumer			141,106				113,105
Commercial			77,326				70,410
Subtotal			612,052				552,005
Allowance for loan losses			(7,210	)			(5,553	)
Net loans		$	604,842			$	546,452

Activity in the allowance for loan losses was as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
(In Thousands of Dollars)		2009				2008				2009				2008
Balance at beginning of period		$	6,640			$	5,487			$	5,553			$	5,459
Provision for loan losses			1,550				350				3,050				560
Recoveries			114				89				492				326
Loans charged off			(1,094	)			(493	)			(1,885	)			(912	)
Balance at end of period		$	7,210			$	5,433			$	7,210			$	5,433

Individually impaired loans were as follows:

		September 30,				December 31,
(In Thousands of Dollars)		2009				2008
Loans with no allocated allowance for loan losses		$	641			$	213
Loans with allocated allowance for loan losses			8,394				2,425
		$	9,035			$	2,638
Amount of the allowance for loan losses allocated		$	2,407			$	555

Interest income recognized during impairment for the periods was immaterial.

Nonperforming loans were as follows:

		September 30,				December 31,
(In Thousands of Dollars)		2009				2008
Nonaccrual loans:
Residential real estate		$	1,978			$	1,484
Commercial real estate			7,786				2,821
Consumer			206				129
Commercial			2,124				341
Loans past due over 90 days still on accrual			546				562
Total nonperforming loans		$	12,640			$	5,337
Other real estate owned			329				65
Total nonperforming assets		$	12,969			$	5,402
Percentage of nonperforming loans to loans			2.07	%			.97	%
Percentage of nonperforming assets to loans			2.12	%			.98	%
Percentage of nonperforming assets to total assets			1.28	%			.61	%

The identification of loans as impaired and the valuation of collateral dependent impaired loans is a challenging component of our financial reporting process due to the timing of when a loan is identified as impaired and the need to timely close the Company’s books for a given period. Typically, non-homogeneous 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. Because the circumstances surrounding loan collection are commonly fluid, we often conclude a loan is impaired relatively late in the financial reporting process. Given this, when we identify a loan as impaired and also conclude that the loan is collateral dependent, we perform an internal collateral valuation as an interim measure. We typically obtain an external appraisal to validate our internal collateral valuation as soon as is practical. To the extent that an external appraisal returns a value estimate that is materially different from our internally generated estimate before the release of our interim or annual financial statements, we would adjust the associated specific loss reserve and, if necessary, the Company’s consolidated financial statements for the difference.

Earnings Per Share:

The computation of basic and diluted earnings per share is shown in the following table:

		Three months ended								Nine months ended
		September 30,								September 30,
(Dollars in Thousands, except Per Share Data)		2009				2008				2009				2008
Basic EPS computation
Numerator – Net income		$	1,556			$	999			$	4,897			$	4,257
Denominator – Weighted average shares outstanding			13,415,896				13,139,005				13,329,621				13,082,198
Basic earnings per share		$	.12			$	.08			$	.37			$	.33
Diluted EPS computation
Numerator – Net income		$	1,556			$	999			$	4,897			$	4,257
Denominator – Weighted average shares outstanding for basic earnings per share			13,415,896				13,139,005				13,329,621				13,082,198
Effect of Stock Options			0				0				0				0
Weighted averages shares for diluted earnings per share			13,415,896				13,139,005				13,329,621				13,082,198
Diluted earnings per share		$	.12			$	.08			$	.37			$	.33

Stock options for 37,000 and 47,500 shares were not considered in the computing of diluted earnings per share for 2009 and 2008 respectively because they were antidilutive.

Stock Based Compensation:

The Corporation’s Stock Option Plan permitted the grant of share options to its directors, officers and employees. Under the terms of the Plan no additional shares can be issued. Option awards were granted with an exercise price equal to the market price of the Corporation’s common stock at the date of grant, those option awards have vesting periods of 5 years and have 10-year contractual terms. At September 30, 2009 there are 37,000 outstanding options of which 32,000 are fully vested and exercisable. All outstanding options are expected to vest.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Total compensation cost charged against income for the stock option plan for the quarter ended September 30, 2009 was not material. No related income tax benefit was recorded.

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.

Acquisition:

On March 31, 2009, the Corporation completed its acquisition of Butler Wick Trust Company, a wholly owned subsidiary of Butler Wick Corp. Farmers National Banc Corp acquired the capital stock of Butler Wick Trust for cash in the amount of $12.125 million, subject to certain adjustments contained in the stock purchase agreement.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition:

Cash and due from banks		$	1,614
Securities available for sale			2,071
Premises and equipment			44
Goodwill			3,679
Other intangible assets			4,240
Other assets			746
Total assets acquired			12,394
Liabilities assumed			(269	)
Net assets acquired		$	12,125

Recent Accounting Pronouncements

In April 2009, the FASB issued new guidance impacting FASB ASC 320-10, Staff Position (FSP) No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary (OTTI) for debt securities. The FSP requires an entity to assess 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 these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Through the nine-month period ended September 30, 2009, the Corporation had not recognized any other-than-temporary impairment charges on debt securities. The adoption of this FSP on April 1, 2009 did not have a material impact on the results of operations or financial position.

In April 2009, the FASB issued ASC 820, Staff Position (FSP) No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position.

In April 2009, the FASB issued ASC 825-10-50, FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. The adoption of this FSP at June 30, 2009 did not have a material impact on the results of operations or financial position as it only required disclosures which are included in the Fair Value Note.

In December 2007, the FASB issued ASC 805, FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. During March 2009, the Corporation acquired Butler Wick Trust Company, and the principals and requirements of FAS 141(R) were used to account for the combination.

In December 2007, the FASB issued ASC 810-10, SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. FAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. The impact of adoption was not material.

In March 2008, the FASB issued ASC 815-10, SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133.” FAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. FAS No. 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this standard did not have a material effect on the Corporation’s results of operations or financial position.

Recently Issued but not yet Effective Accounting Pronouncements:

Accounting for Transfers of Financial Assets: In June 2009, FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” The objective of SFAS No. 166 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS No. 166 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Management is still evaluating the impact of this accounting standard.

Amendments to FASB Interpretation No. 46(R): In June 2009, FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R).” The objective of SFAS No. 167 is to amend certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Management is still evaluating the impact of this accounting standard.

Fair Value

ASC 820, SFAS No. 157 defines fair value as 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. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes 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 and asset or liability.

The Company used the following methods and significant assumptions to estimate fair value.

Investment Securities : The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (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). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans : The fair value of impaired loans with specific allocations of the allowance for loan losses is generally 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 typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

						Fair Value Measurements at
						September 30, 2009 Using:
										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
(In Thousands of Dollars)		Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Investment securities available-for sale U.S. government-sponsored entities and agencies		$	97,244			$	0			$	97,244			$	0
States and political subdivisions			67,084				0				67,084				0
Mortgage-backed securities-residential			155,447				0				155,434				13
Collateralized mortgage obligations			356				0				356				0
Equity securities			386				386				0				0
Other securities			264				0				264				0
Total investment securities		$	320,781			$	386			$	320,382			$	13

Fair Value Measurements at

December 31, 2008 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Inputs

(In Thousands of Dollars)

Value

(Level 1)

(Level 2)

(Level 3)

Financial Assets

Investment securities available-for sale

$

271,605

$

196

$

262,432

$

8,977

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 three month and nine month periods ended September 30, 2009:

		Investment
		Securities
		Available-for-sale
Three months ended September 30, 2009
Balance of recurring Level 3 assets at July 1, 2009		$	16
Total unrealized gains or losses:
Included in other comprehensive income			0
Purchases, sales, issuances and settlements, net			(3	)
Transfers in and/or out of Level 3			0
Balance of recurring Level 3 assets at September 30, 2009		$	13

		Investment
		Securities
		Available-for-sale
Nine months ended September 30, 2009
Balance of recurring Level 3 assets at January 1, 2009		$	8,977
Total unrealized gains or losses:
Included in other comprehensive income			(379	)
Purchases, sales, issuances and settlements, net			(1,613	)
Transfers in and/or out of Level 3			(6,972	)
Balance of recurring Level 3 assets at September 30, 2009		$	13

Assets measured at fair value on a non-recurring basis are summarized below:

		Fair Value Measurements at
		September 30, 2009 Using:
						Significant
		Quoted Prices in				Other				Significant
		Active Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
(In Thousands of Dollars)		(Level 1)				(Level 2)				(Level 3)
Impaired loans			0				0			$	5,987
Real estate owned			0				0				329
Total non-recurring items		$	0			$	0			$	6,316

Fair Value Measurements at

December 31, 2008 Using:

Significant

Quoted Prices in

Other

Significant

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(In Thousands of Dollars)

(Level 1)

(Level 2)

(Level 3)

Impaired loans

0

0

$

1,870

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a recorded investment amount of $8.39 million, with a valuation allowance of $2.41 million, resulting in an additional allocated provision for loan losses of $577 thousand for the three month period ended September 30, 2009 and $2.29 million for the nine month period ended September 30, 2009.

In accordance with FSP FAS 107-1, the carrying amounts and estimated fair values of financial instruments, at September 30, 2009 are as follows:

(In Thousands of Dollars)		Carrying				Fair
September 30, 2009		Amount				Value
Financial assets
Cash and cash equivalents		$	45,152			$	45,152
Securities available-for-sale			320,781				320,781
Restricted stock			3,902				n/a
Loans, net			604,842				620,795
Accrued interest receivable			4,458				4,458
Financial liabilities
Deposits			743,899				749,659
Short-term borrowings			142,999				142,999
Long-term borrowings			43,273				45,793
Accrued interest payable			1,287				1,287

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of restricted stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material (or is based on the current fees or cost that would be charged to enter into or terminate such arrangements).

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 statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

The Corporation’s strategies are to continue our growth initiatives and increase earnings; maintain the appropriate levels of capital that are essential so that we remain a well-capitalized institution under all regulatory guidelines; continue to deal with the number of issues the banking industry has been facing; closely monitor our efficiency ratio; and strategically manage interest rate risk and credit risk, specifically, the non-performing assets.

Results of Operations

Comparison of selected financial ratios and other results at or for the three-month and nine-month periods ending September 30, 2009 and 2008:

		At or for Three months								At or for Nine months
		ended September 30,								ended September 30,
(Dollars in Thousands, except Per Share Data)		2009				2008				2009				2008
Total Assets		$	1,016,051			$	872,057			$	1,016,051			$	872,057
Net Income		$	1,556			$	999			$	4,897			$	4,257
Basic and Diluted Earnings per share		$	.12			$	.08			$	.37			$	.33
Return on Average Assets (Annualized)			.62	%			.46	%			.69	%			.68	%
Return on Average Equity (Annualized)			7.71	%			5.47	%			8.27	%			7.68	%
Efficiency Ratio (tax equivalent basis)			65.02	%			60.77	%			67.48	%			63.20	%
Equity to Asset Ratio			8.10	%			8.41	%			8.10	%			8.41	%
Dividends to Net Income			51.74	%			157.86	%			81.54	%			122.76	%
Net Loans to Assets			59.53	%			60.14	%			59.53	%			60.14	%
Loans to Deposits			82.28	%			81.54	%			82.28	%			81.54	%

Despite the challenging economic environment, the Corporation was able to report another quarter of solid earnings. The third quarter performance reflects continued growth in core loan portfolios and deposits. The foundation of the Corporation’s financial position – talented people, prudent risk management, liquidity and capital position has served the Corporation well in these challenging times and continues to differentiate us from the competition. Significant drivers of the Corporation’s performance were increases in net interest income, improvement in net interest margin, continued loan growth across our strategic lending business lines, improvements in fee income and expense controls. These were partially offset by FDIC deposit insurance expenses and the additional provision recorded in the allowance for loan losses. With the growth of the loan portfolio, higher net loan losses and the continued economic stress in the markets, the Corporation increased the allowance for loan loss provision balance, while maintaining favorable key asset quality ratios compared to peers. The credit team has implemented a proactive process to identify credit problems and take appropriate steps to assure the loan loss reserve is adequate to cover the exposures in the loan portfolio.

The acquisition of Butler Wick Trust Company (Farmers Trust Company) gives the Corporation the ability to provide investment, trust, and estate services to private individuals and small corporate clients with a high level of attention and confidentiality. The combination of Farmers and Butler Wick Trust Company represents a win-win for the respective organizations. The addition to Farmers National Bank significantly complements core retail banking and asset management.

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.

Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)

		Three Months Ended												Three Months Ended
		September 30, 2009												September 30, 2008
		AVERAGE												AVERAGE
		BALANCE				INTEREST				RATE (1)				BALANCE				INTEREST				RATE (1)
EARNING ASSETS
Loans (3) (5) (6)		$	592,634			$	9,740				6.52	%		$	516,405			$	8,946				6.89	%
Taxable securities (4)			224,323				2,336				4.13				191,569				2,131				4.43
Tax-exempt securities (4) (6)			62,337				946				6.02				67,846				1,000				5.86
Equity Securities (2) (6)			5,435				60				4.38				7,725				94				4.84
Federal funds sold			38,284				11				0.11				18,662				83				1.77
Total earning assets			923,013				13,093				5.63				802,207				12,254				6.08
NONEARNING ASSETS
Cash and due from banks			22,772												24,557
Premises and equipment			14,295												14,366
Allowance for Loan Losses			(6,721	)											(5,371	)
Unrealized gains (losses) on securities			5,086												(2,839	)
Other assets (3)			39,879												22,903
Total Assets		$	998,324											$	855,823
INTEREST-BEARING LIABILITIES
Time deposits		$	330,262			$	2,493				2.99	%		$	287,584			$	2,977				4.12	%
Savings deposits			242,290				660				1.08				194,813				766				1.56
Demand deposits			101,865				65				0.25				98,399				116				0.47
Short term borrowings			132,957				463				1.38				83,907				512				2.43
Long term borrowings			43,592				497				4.52				48,270				551				4.54
Total Interest-Bearing Liabilities			850,966				4,178				1.95				712,973				4,922				2.75
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits			63,108												65,734
Other Liabilities			4,147												4,486
Stockholders’ equity			80,103												72,630
Total Liabilities and Stockholders’ Equity		$	998,324											$	855,823
Net interest income and interest rate spread						$	8,915				3.68	%						$	7,332				3.33	%
Net interest margin											3.83	%											3.64	%

Average Balance Sheets and Related Yields and Rates
(Dollar Amounts in Thousands)

		Nine Months Ended												Nine Months Ended
		September 30, 2009												September 30, 2008
		AVERAGE												AVERAGE
		BALANCE				INTEREST				RATE (1)				BALANCE				INTEREST				RATE (1)
EARNING ASSETS
Loans (3) (5) (6)		$	572,573			$	28,392				6.63	%		$	509,107			$	26,251				6.89	%
Taxable securities (4)			214,619				6,916				4.34				173,296				5,663				4.37
Tax-exempt securities (4) (6)			60,795				2,741				6.03				70,391				3,101				5.88
Equity Securities (2) (6)			5,506				197				4.78				7,684				350				6.08
Federal funds sold			28,735				25				0.12				18,631				322				2.31
Total earning assets			882,228				38,271				5.80				779,109				35,687				6.12
NONEARNING ASSETS
Cash and due from banks			22,767												23,367
Premises and equipment			14,185												14,419
Allowance for Loan Losses			(6,155	)											(5,462	)
Unrealized gains (losses) on securities			5,231												(491	)
Other assets (3)			33,863												21,467
Total Assets		$	952,119											$	832,409
INTEREST-BEARING LIABILITIES
Time deposits		$	307,424			$	7,348				3.20	%		$	288,978			$	9,495				4.39	%
Savings deposits			230,673				2,045				1.19				179,540				2,179				1.62
Demand deposits			100,843				247				0.33				97,614				352				0.48
Short term borrowings			119,965				1,435				1.60				74,627				1,497				2.68
Long term borrowings			47,011				1,515				4.31				50,119				1,717				4.58
Total Interest-Bearing Liabilities			805,916				12,590				2.09				690,878				15,240				2.95
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits			62,417												62,179
Other Liabilities			4,628												5,322
Stockholders’ equity			79,158												74,030
Total Liabilities and Stockholders’ Equity		$	952,119											$	832,409
Net interest income and interest rate spread						$	25,681				3.71	%						$	20,447				3.17	%
Net interest margin											3.90	%											3.51	%