Farmers National Banc (FMNB) 10-Q 2007 Q1 Quarterly report

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 March 31, 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. Yesþ       Noo

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 filero       Accelerated filerþ       Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso       Noþ

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 April 30, 2007
Common Stock, No Par Value	13,067,182 shares

		Page Number
PART I — FINANCIAL INFORMATION
Item 1	Financial Statements
	Included in Part I of this report:
	Farmers National Banc Corp. and Subsidiary
	Consolidated Balance Sheets	1
	Consolidates Statements of Income and Comprehensive Income	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Unaudited Consolidated Financial Statements	4-7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7-12
Item 3	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4	Controls and Procedures	13
PART II — OTHER INFORMATION
Item 1	Legal Proceedings	13
Item 1A	Risk Factors	13
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	14
Item 3	Defaults Upon Senior Securities	14
Item 4	Submission of Matters to a Vote of Security Holders	14
Item 5	Other Information	14
Item 6	Exhibits	15
SIGNATURES		16
10-Q Certifications		17-18
Section 906 Certifications		19-20
EX-31.1
EX-31.2
EX-32.1
EX-32.2

CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)

	(In Thousands of Dollars)
	March 31,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	26,664		$	24,447
Federal funds sold		106			9,591
TOTAL CASH AND CASH EQUIVALENTS		26,770			34,038
Securities available for sale		245,894			255,799
Loans		507,088			508,188
Less allowance for loan losses		5,556			5,594
NET LOANS		501,532			502,594
Premises and equipment, net		14,593			14,744
Other assets		14,491			14,409
TOTAL ASSETS	$	803,280		$	821,584
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	59,056		$	66,003
Interest-bearing		537,912			553,744
TOTAL DEPOSITS		596,968			619,747
Short-term borrowings		79,171			77,792
Long-term borrowings		46,725			41,601
Other liabilities		4,294			6,221
TOTAL LIABILITIES		727,158			745,361
Commitments and contingent liabilities
Stockholders’ Equity:
Common Stock — Authorized 25,000,000 shares; issued 14,654,727 in 2007 and 14,567,280 in 2006		89,288			88,366
Retained earnings		9,340			9,617
Accumulated other comprehensive income (loss)		(1,187	)		(1,345	)
Treasury stock, at cost; 1,580,045 shares in 2007 and 1,494,525 in 2006		(21,319	)		(20,415	)
TOTAL STOCKHOLDERS’ EQUITY		76,122			76,223
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	803,280		$	821,584

See accompanying notes

1

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
	March 31,		March 31,
	2007		2006
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	8,365	$	8,023
Taxable securities		1,852		1,874
Tax exempt securities		682		587
Dividends		144		110
Federal funds sold		28		42
TOTAL INTEREST AND DIVIDEND INCOME		11,071		10,636
INTEREST EXPENSE
Deposits		4,129		3,428
Short-term borrowings		647		523
Long-term borrowings		578		531
TOTAL INTEREST EXPENSE		5,354		4,482
NET INTEREST INCOME		5,717		6,154
Provision for loan losses		60		110
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,657		6,044
NONINTEREST INCOME
Service charges on deposit accounts		680		683
Security gains		552		257
Other operating income		365		353
TOTAL NONINTEREST INCOME		1,597		1,293
NONINTEREST EXPENSES
Salaries and employee benefits		2,938		2,792
Occupancy and equipment		677		646
State and local taxes		227		225
Professional fees		147		127
Loan expenses		77		95
Other operating expenses		1,052		878
TOTAL NONINTEREST EXPENSES		5,118		4,763
INCOME BEFORE INCOME TAXES		2,136		2,574
INCOME TAXES		327		612
NET INCOME	$	1,809	$	1,962
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in net unrealized gains (losses) on securities, net of reclassifications		158		(4	)
COMPREHENSIVE INCOME	$	1,967	$	1,958
NET INCOME PER SHARE-basic and diluted	$	0.14	$	0.15
DIVIDENDS PER SHARE	$	0.16	$	0.16

See accompanying notes

2

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)

	(In Thousands except Per Share Data)
	Three Months Ended
	March 31,			March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,809		$	1,962
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses		60			110
Depreciation and amortization		321			270
Net amortization of securities		109			215
Security gains		(552	)		(257	)
Federal Home Loan Bank dividends		0			(56	)
Net change in other assets and liabilities		(2,203	)		622
NET CASH FROM OPERATING ACTIVITIES		(456	)		2,866
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of securities available for sale		12,409			11,847
Proceeds from sales of securities available for sale		2,710			1,696
Purchases of securities available for sale		(4,529	)		(787	)
Loan originations and payments, net		1,002			327
Additions to premises and equipment		(60	)		(33	)
NET CASH FROM INVESTING ACTIVITIES		11,532			13,050
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits		(22,779	)		(11,605	)
Net change in short-term borrowings		1,379			(3,360	)
Proceeds from Federal Home Loan Bank borrowings and other debt		10,000			10,000
Repayment of Federal Home Loan Bank borrowings and other debt		(4,876	)		(1,313	)
Repurchase of common stock		(904	)		(1,578	)
Cash dividends paid		(2,086	)		(2,037	)
Proceeds from dividend reinvestment		922			992
NET CASH FROM FINANCING ACTIVITIES		(18,344	)		(8,901	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(7,268	)		7,015
Beginning cash and cash equivalents		34,038			31,614
Ending cash and cash equivalents	$	26,770		$	38,629
Supplemental cash flow information:
Interest paid	$	5,556		$	4,245

See accompanying notes

3

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

Securities:

Securities available for sale at March 31, 2007 and December 31, 2006 are summarized as follows:

			Gross		Gross
			Unrealized		Unrealized
(In Thousands of Dollars)	Fair Value		Gains		Losses
March 31, 2007
U.S. Treasury and U.S. Government sponsored enterprises	$	73,056	$	123	$	(669	)
Mortgage-backed securities		97,790		66		(2,286	)
Obligations of states and political subdivisions		70,090		322		(439	)
Total debt securities		240,936		511		(3,394	)
Equity securities		4,958		1,056		0
TOTALS	$	245,894	$	1,567	$	(3,394	)

			Gross		Gross
			Unrealized		Unrealized
(In Thousands of Dollars)	Fair Value		Gains		Losses
December 31, 2006
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

Earnings Per Share:

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

	Three months ended
	March 31,
(In Thousands, except Per Share Data)	2007		2006
Basic EPS computation
Numerator — Net income	$	1,809	$	1,962
Denominator — Weighted average shares outstanding		13,048,716		12,985,336
Basic earnings per share	$	.14	$	.15
Diluted EPS computation
Numerator — Net income	$	1,809	$	1,962
Denominator — Weighted average shares outstanding for basic earnings per share		13,048,716		12,985,336
Effect of Stock Options		0		4,125
Weighted averages shares for diluted earnings per share		13,048,716		12,989,461
Diluted earnings per share	$	.14	$	.15

For the quarter ended March 31, 2007, 48,000 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 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 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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 did not have a material effect on the financial statements.

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

6

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

7

Results of Operations

Comparison of selected financial ratios and other results for the three-month period ending March 31, 2007:

	Three months ended
	March 31,
(In Thousands, except Per Share Data)	2007		��	2006
Total Assets	$	803,280		$	820,965
Net Income	$	1,809		$	1,962
Basic and Diluted Earnings Per Share	$	.14		$	.15
Return on Average Assets (Annualized)		.91	%		.97	%
Return on Average Equity (Annualized)		9.70	%		10.46	%
Efficiency Ratio (Year-to-date)		75.69	%		66.24	%
Capital to Asset Ratio		9.48	%		9.16	%
Dividends to Net Income (Year-to-date)		115.31	%		105.56	%
Loans to Assets		63.13	%		62.27	%
Net Loans to Deposits		84.01	%		81.62	%

Net Interest Income. The following schedule details 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

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

	Three Months Ended								Three Months Ended
	March 31, 2007								March 31, 2006
	AVERAGE								AVERAGE
	BALANCE			INTEREST		RATE (1)			BALANCE			INTEREST		RATE (1)
EARNING ASSETS
Loans (3) (4) (5)	$	504,433		$	8,454		6.80	%	$	510,146		$	8,105		6.44	%
Taxable securities		178,476			1,852		4.21			191,450			1,875		3.97
Tax-exempt securities (5)		69,983			1,026		5.95			59,396			883		6.03
Equity Securities (2) (5)		10,315			164		6.45			12,252			122		4.04
Federal funds sold		2,117			28		5.36			3,784			42		4.50
Total earning assets		765,324			11,524		6.11			777,028			11,027		5.76
NONEARNING ASSETS
Cash and due from banks		22,416								25,488
Premises and equipment		14,710								15,067
Allowance for Loan Losses		(5,585	)							(5,871	)
Other assets (3)		9,370								8,216
Total Assets	$	806,235							$	819,928
INTEREST-BEARING LIABILITIES
Time deposits	$	273,082		$	3,075		4.57	%	$	286,107		$	2,641		3.74	%
Savings deposits		175,259			915		2.12			154,262			519		1.36
Demand deposits		97,961			139		0.58			124,333			268		0.87
Repurchase agreements		70,112			625		3.62			68,700			507		2.99
Borrowings		50,089			600		4.86			48,827			547		4.54
Total Interest-Bearing Liabilities		666,503			5,354		3.26			682,229			4,482		2.66
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits		58,919								56,567
Other Liabilities		5,191								5,084
Stockholders’ equity		75,622								76,048
Total Liabilities and Stockholders’ Equity	$	806,235							$	819,928
Net interest income and interest rate spread				$	6,170		2.85	%				$	6,545		3.10	%
Net interest margin							3.27	%							3.42	%

(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 $404 and $423 for 2007 and 2006 respectively.
(5)	For 2007, adjustments of $89 thousand, $344 thousand, and $20 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 $88 thousand, $316 thousand, and $12 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

Taxable equivalent net interest income. Taxable equivalent net interest income for the first three months ended March 31, 2007 totaled $6.171 million, a decrease of $374 thousand or 5.71% compared to the quarter ended March 31, 2006. Although the yield on earning assets increased by 35 basis points over the past 12 months, this benefit was offset by a 60 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 $21.00 million or 13.61% over the prior year three month period which helped drive up interest expense on savings deposits by $396 thousand. The interest expense related to time deposits and repurchase agreements increased 17.47% over the prior year comparable quarter which is consistent with the market increase in short-term interest rates.

Noninterest Income. Total noninterest income for the three month period ended March 31, 2007 increased by $304 thousand or 23.51% compared to the same period in 2006. This increase is mainly due to a $295 thousand increase in gains on the sale of investment securities.

Noninterest Expense. Noninterest expense was $5.12 million for the first three months of 2007 compared to $4.76 million for the same period in 2006. This amounts to an increase of 7.56%. Most of this increase is the result of a $146 thousand increase in salaries and employee benefits mainly attributable to higher health insurance costs.

The efficiency ratio increased to 75.69% for the first three months of 2007 compared to 66.24% for the first three months of 2006. The efficiency ratio was adversely impacted by the $437 thousand decline in net interest income. The efficiency ratio is calculated as follows: non-interest expense divided by the sum of 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 $327 thousand for the first three months of 2007 and $612 thousand for the first three months of 2006, a decrease of $285 thousand or 46.57%. The effective tax rate for the first three months of 2007 was 15.31% compared to 23.78% for the same time in 2006. The current period’s expense was impacted favorably by an adjustment to the income tax liability. This decrease along with the Corporation’s increased purchases of tax-exempt municipal securities and a decrease in pretax income resulted in the lower tax rate.

Other Comprehensive Income. For the first three months of 2007, the change in net unrealized gains on securities, net of reclassifications, resulted in a gain of $158 thousand compared to a loss of $4 thousand for the same period in 2006. The change was due to debt and equity market recoveries after several interest rate increases.

Financial Condition

Total assets decreased $18.304 million or 2.23% 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 March 31, 2007 of 9.48%.

Securities. Securities available for sale decreased $9.91 million. Matured securities were used to partially fund the decrease of $22.779 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 $242 thousand increase in the net unrealized gains (losses) on securities.

Loans. Gross loans decreased slightly since December 31, 2006. Commercial Real Estate loans grew $3.775 million or 2.09% since December 31, 2006. The growth in commercial real estate loans offset the decline in balance in indirect installment loans, which decreased $3.336 million or 3.28%.

10

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. Loans contributed 75.56% of total interest income for the three months ended March 31, 2007 and 75.43% for the three months ended March 31, 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)

	3/31/07			12/31/06			9/30/06			6/30/06			3/31/06
Nonperforming loans	$	2,458		$	1,722		$	1,853		$	1,884		$	2,609
Nonperforming loans as a % of total loans		.48	%		.34	%		.36	%		.37	%		.51	%
Allowance for loan losses	$	5,556		$	5,594		$	5,845		$	5,848		$	5,870
Allowance for loan losses as a % of loans		1.10	%		1.10	%		1.14	%		1.15	%		1.15	%
Allowance for loan losses as a % of nonperforming loans		226.04	%		324.85	%		315.39	%		310.33	%		224.99	%

The allowance for loan losses as a percentage of loans at March 31, 2007 equaled the December 31, 2006 amount of 1.10%. The provision for loan losses for the first three months of 2007 and 2006 was $60 thousand and $110 thousand, respectively. Net charge-offs totaled $98 thousand for the first three months of 2007 down from $100 thousand for the first three months of 2006. The provision closely tracks net charge-offs. During 2007 approximately 73% of gross charge-offs have occurred in the indirect loan portfolio compared to 83% in 2006. Non-performing loans to total loans have increased from .34% as of December 31, 2006 to .48% as of March 31, 2007. The ratio of the allowance for loan losses (ALLL) to non-performing loans is 226%.

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 $22.779 million since December 31, 2006. Balances in the Corporation’s time deposits decreased $13.091 million or 4.67% between December 31, 2006 and March 31, 2007. Money market accounts decreased $1.797 million since December 31, 2006. The Company prices deposit rates to remain competitive within the market and to retain customers.

Borrowings. Total borrowings increased $6.503 million or 5.45% since December 31, 2006. The Corporation offset the drop in deposits with an increase in securities sold under repurchase agreements, which grew $8.761 million during the three-month period.

Capital Resources. Total stockholders’ equity decreased slightly from $76.223 million at December 31, 2006 to $76.122 million at March 31, 2007. During the first three months of 2007, the mark to market adjustment of securities increased accumulated other comprehensive income by $158 thousand and the repurchase of treasury stock decreased stockholders’ equity by $904 thousand.

11

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 March 31, 2007 the Corporation’s total risk-based capital ratio stood at 15.96%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 14.81% and 9.56%, respectively. Management believes, as of March 31, 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

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 three months of 2007, net cash from investing activities amounted to $11.532 million compared to $13.050 million provided in investing activities for the same period in 2006. Purchase of securities available for sale amounted to $4.529 million in 2007 compared to $787 thousand in 2006. Net changes in loans decreased by $1.002 million during this year’s first three-month period and decreased $327 thousand over the same three-month period in 2006. The decreases in net loans during 2007 compared to 2006 can be attributed to the local economic conditions and the interest rate environment.

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash used by financing activities amounted to $18.344 million for the first three months of 2007 compared to $8.901 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 $22.779 million for the three-month period ended March 31, 2007 compared to a $11.605 million decrease for the same period in 2006.

12

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 March 31, 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 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.

13

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

On June 13, 2006, the Corporation announced the adoption of a stock repurchase program that authorizes the repurchase of up to 4.9% or approximately 635,117 shares of its outstanding common stock in the open market or in privately negotiated transactions. This program expires in June 2007.

The following table summarizes the treasury stock purchased by the issuer during the first 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
January 1-31		9,020	$	10.70		9,020		481,059
February 1-28		26,500	$	10.59		26,500		454,559
March 1-31		50,000	$	10.54		50,000		404,559
TOTAL		85,520	$	10.57		85,520		404,559

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

(a) Farmers National Banc Corp’s annual meeting of shareholders was held on March 29, 2007.

(b & c) Proxies were solicited by Farmers National Banc Corp’s management pursuant to Regulation 14 under the Securities Exchange Act of 1934. Elected to serve as director for a three year term were the Board of Director’s nominees:

Elected Director	Votes For		Votes Against
Ralph D. Macali		9,165,673		103,393
Frank L. Paden		8,796,072		352,640
Earl R. Scott		8,959,180		193,796

Continuing Director	Term Expiring
Benjamin R. Brown	March 2009
Anne F. Crawford	March 2009
James R. Fisher	March 2009
Joseph D. Lane	March 2008
Ronald V. Wertz	March 2008

Item 5. Other Information

Not applicable.

14

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)

15

     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: May 9, 2007

/s/ Frank L. Paden

Frank L. Paden
President and Secretary

Dated: May 9, 2007

/s/ Carl D. Culp

Carl D. Culp
Executive Vice President and Treasurer

16