10-Q 1 l14986ae10vq.htm FARMERS NATIONAL BANC CORP. 10-Q 10-Q
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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, 2005   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 incorporation or organization)   (I.R.S. Employer Identification No)
     
     
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 an accelerated filer (as defined in Rule 12b-2 of the Act).                 Yes þ                 No o
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, 2005
     
     
Common Stock, No Par Value   13,043,982 shares
 
 

 

         
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PART I — FINANCIAL INFORMATION
        
 
        
Item 1. Financial Statements
        
 
        
Included in Part I of this report:
        
 
        
Farmers National Banc Corp. and Subsidiary
        
 
        
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10-Q Certifications
     14-15  
 
        
Section 906 Certifications
     16-17  
 EX-31(A) Cert
 EX-31(B) Cert
 EX-32(B) Cert
 EX-32(B) Cert

 

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CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
                 
    (In Thousands of Dollars)
    June 30,   December 31,
    2005   2004
     
ASSETS
                
Cash and due from banks
   $ 28,753     $ 29,619  
Federal funds sold
     1,554       3,951  
     
TOTAL CASH AND CASH EQUIVALENTS
     30,307       33,570  
     
 
                
Securities available for sale
     286,995       281,883  
 
                
Loans
     497,905       485,679  
Less allowance for loan losses
     6,151       6,144  
     
NET LOANS
     491,754       479,535  
     
 
                
Premises and equipment, net
     15,351       15,655  
Other assets
     8,057       7,196  
     
TOTAL ASSETS
   $ 832,464     $ 817,839  
     
 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Deposits:
                
Noninterest — bearing
   $ 56,198     $ 57,026  
Interest-bearing
     565,981       565,198  
     
TOTAL DEPOSITS
     622,179       622,224  
     
 
                
Securities sold under repurchase agreements
     82,788       70,912  
Federal Home Loan Bank advances
     44,579       42,016  
Other borrowings
     1,096       1,295  
Other liabilities
     2,688       2,738  
     
TOTAL LIABILITIES
     753,330       739,185  
     
 
                
Commitments and contingent liabilities
                
 
                
Stockholders’ Equity:
                
Common Stock — Authorized 25,000,000 shares; issued 14,067,946 in 2005 and 13,912,515 in 2004
     82,484       80,200  
Retained earnings
     10,975       10,958  
Accumulated other comprehensive income (loss)
     (27 )     893  
Treasury stock, at cost; 991,464 shares in 2005 and 933,041 in 2004
     (14,298 )     (13,397 )
     
TOTAL STOCKHOLDERS’ EQUITY
     79,134       78,654  
     
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
   $ 832,464     $ 817,839  
     
See accompanying notes.

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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,
    2005   2004   2005   2004
     
 
                                
INTEREST INCOME
                                
Interest and fees on loans
   $ 7,767     $ 7,765     $ 15,244     $ 15,633  
Interest and dividends on securities:
                                
Taxable interest
     2,095       2,031       4,259       4,248  
Nontaxable interest
     523       370       984       718  
Dividends
     96       110       211       274  
Interest on federal funds sold
     70       8       119       53  
     
TOTAL INTEREST INCOME
     10,551       10,284       20,817       20,926  
     
 
                                
INTEREST EXPENSE
                                
Deposits
     2,826       2,575       5,479       5,133  
Short-term borrowings
     408       281       704       516  
Long-term borrowings
     421       310       827       678  
     
TOTAL INTEREST EXPENSE
     3,655       3,166       7,010       6,327  
     
NET INTEREST INCOME
     6,896       7,118       13,807       14,599  
Provision for loan losses
     0       120       269       300  
     
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
     6,896       6,998       13,538       14,299  
     
 
                                
OTHER INCOME
                                
Service charges on deposit accounts
     676       630       1,284       1,098  
Security gains (losses)
     (83 )     0       185       0  
Other operating income
     336       303       666       615  
     
TOTAL OTHER INCOME
     929       933       2,135       1,713  
     
 
                                
OTHER EXPENSES
                                
Salaries and employee benefits
     3,074       2,666       5,838       5,417  
Net occupancy expense of premises
     324       308       669       644  
Furniture and equipment expense, including depreciation
     334       310       696       657  
State and local taxes
     231       234       462       456  
Loan expenses
     100       92       188       169  
Other operating expenses
     1,102       1,126       2,192       2,220  
     
TOTAL OTHER EXPENSES
     5,165       4,736       10,045       9,563  
     
INCOME BEFORE FEDERAL INCOME TAXES
     2,660       3,195       5,628       6,449  
INCOME TAXES
     665       900       1,459       1,817  
     
NET INCOME
   $ 1,995     $ 2,295     $ 4,169     $ 4,632  
 
                                
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
                                
Change in net unrealized gains (losses) on securities, net of reclassifications
     1,335       (4,622 )     (920 )     (3,573 )
     
COMPREHENSIVE INCOME (LOSS)
   $ 3,330     $ (2,327 )   $ 3,249     $ 1,059  
     
 
                                
NET INCOME PER SHARE-basic and diluted
   $ 0.15     $ 0.18     $ 0.32     $ 0.36  
     
 
                                
DIVIDENDS PER SHARE
   $ 0.16     $ 0.16     $ 0.32     $ 0.31  
     
See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY
(Unaudited)
                 
    (In Thousands of Dollars)
    Six Months Ended
    June 30,   June 30,
    2005   2004
     
 
                
CASH FLOWS FROM OPERATING ACTIVITIES
                
NET CASH FROM OPERATING ACTIVITIES
   $ 5,345     $ 6,043  
 
                
CASH FLOWS FROM INVESTING ACTIVITIES
                
Proceeds from maturities and repayments of securities available for sale
     28,870       35,981  
Proceeds from sales of securities available for sale
     14,705       0  
Purchases of securities available for sale
     (50,520 )     (34,933 )
Loan originations and payments, net
     (12,938 )     (3,428 )
Additions to premises and equipment
     (191 )     (501 )
     
NET CASH FROM INVESTING ACTIVITIES
     (20,074 )     (2,881 )
 
                
CASH FLOWS FROM FINANCING ACTIVITIES
                
Net change in deposits
     (45 )     (1,994 )
Net change in short — term borrowings
     11,705       9,613  
Proceeds from Federal Home Loan Bank borrowings and other debt
     9,694       10,130  
Repayment of Federal Home Loan Bank borrowings and other debt
     (7,159 )     (21,844 )
Repurchase of Treasury Stock
     (901 )     (2,399 )
Cash dividends paid
     (4,112 )     (4,556 )
Proceeds from dividend reinvestment
     2,284       2,400  
     
NET CASH FROM FINANCING ACTIVITIES
     11,466       (8,650 )
     
NET CHANGE IN CASH AND CASH EQUIVALENTS
     (3,263 )     (5,488 )
 
                
Beginning cash and cash equivalents
     33,570       33,814  
     
Ending cash and cash equivalents
   $ 30,307     $ 28,326  
     
 
                
Supplemental cash flow information:
                
Interest paid
     (6,839 )     (6,377 )
Income taxes paid
     (1,680 )     (1,630 )
See accompanying notes.

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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 2004 Annual Report to Shareholders included in the Company’s 2004 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 and fair values of certain securities are 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.
Stock-Based Compensation:
     Employee compensation expense under stock options is reported using the intrinsic valuation method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at the date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock Based Compensation.

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Notes to Unaudited Consolidated Financial Statements (continued)
                                 
    Three months ended   Six months ended
    June 30,   June 30,
(In Thousands, except Per Share Data)   2005   2004   2005   2004
Net income, as reported
   $ 1,995     $ 2,295     $ 4,169     $ 4,632  
 
                                
Less: Total stock-based employee compensation expense determined under fair-value-based method
     (7 )     (7 )     (13 )     (15 )
 
                                
Pro forma net income
   $ 1,988     $ 2,288     $ 4,156     $ 4,617  
 
                                
Earnings per share (basic and diluted):
                                
As reported
   $ .15     $ .18     $ .32     $ .36  
Pro forma
   $ .15     $ .18     $ .32     $ .36  
Fair Value of Securities:
     Unrealized losses on securities have not been recognized into income because management has the intent and ability to hold 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 and/or market rates change.
Earnings Per Share:
     The computation of basic and diluted earnings per share is shown in the following table:
                                 
    Three months ended   Six months ended
    June 30,   June 30,
(In Thousands, except Per Share Data)   2005   2004   2005   2004
Basic EPS computation
                                
Numerator — Net income
   $ 1,995     $ 2,295     $ 4,169     $ 4,632  
Denominator — Weighted average shares outstanding
     13,013,301       12,921,117       12,985,212       12,921,259  
Basic earnings per share
   $ .15     $ .18     $ .32     $ .36  
 
                                
 
                                
Diluted EPS computation
                                
Numerator — Net income
   $ 1,995     $ 2,295     $ 4,169     $ 4,632  
Denominator — Weighted average shares outstanding for basic earnings per share
     13,013,301       12,921,117       12,985,212       12,921,259  
Effect of Stock Options
     11,396       17,340       13,005       17,076  
Weighted averages shares for diluted earnings per share
     13,024,697       12,938,457       12,998,217       12,938,335  
 
                                
Diluted earnings per share
   $ .15     $ .18     $ .32     $ .36  
 
                                
Share and per share information has been restated to reflect the impact of stock dividends.
Comprehensive Income:
     Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists solely of unrealized gains and losses on securities available for sale.

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Notes to Unaudited Consolidated Financial Statements (continued)
Reclassifications:
     Certain items in the prior year financial statements were reclassified to conform to the current presentation.
Newly Issued But Not Yet Effective Accounting Standards:
     In December 2004, the Financial Accounting Standards Board issued a revised version of Statement of Financial Accounting Standards No. 123. It requires that the fair value of stock options and other share-based compensation be measured as of the date the grant is awarded and expensed over the period of employee service, typically the vesting period. It will be required for the Company as of January 1, 2006. Compensation cost will also be recorded for previously awarded options to the extent that they vest after the effective date. The effect of this pronouncement on future operations is not expected to be material.
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.
Results of Operations
Comparison of the Three and Six Months Ended June 30, 2005 and 2004
     The Corporation’s net income for the first six months of 2005 was $4.169 million, or $.32 per diluted share, which is a 10% decrease compared with the $4.632 million, or $.36 per diluted share earned during the same period last year. During the second quarter of 2005, net income was $1.995 million, or $.15 per diluted share which is a 13.07% decrease compared with the $2.295 million, or $.18 per diluted share earned during the same period last year. The Corporation’s annualized return on average assets and return on average equity for the six month period ended June 30, 2005 was 1.02% and 10.77% respectively, compared to 1.15% and 11.69% for the same period in 2004.
Net Interest Income. Net interest income for the first six months of 2005 totaled $13.807 million, a decrease of $792 thousand or 5.43% compared to the first six months of 2004. Most of this decline is due to an increase in interest expense of $683 thousand or 10.8%. Interest expense on time deposits increased $486 thousand as average balances grew $31.81 million or 14.15%. Additionally, interest income decreased $109 thousand or .52% during the same period. The Corporation’s tax equated

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
annualized net interest margin decreased from 3.99% for the period ending June 30, 2004 to 3.76% for the period ending June 30, 2005. This decline was due to a slight shift in deposit mix to higher costing time deposits combined with a 19 basis point decrease in loan yields. Management will continue to evaluate future interest rate changes so that assets and liabilities may be priced accordingly to minimize the impact on the net interest margin.
Net interest income for the quarter ended June 30, 2005 totaled $6.896 million, a decrease of $222 thousand or 3.12% compared to the quarter ended June 30, 2004. While interest income increased $267 thousand or 2.6%, interest expense increased $489 thousand or 15.45%. The increase in interest expense is attributable to both the $24.221 million increase in average interest-bearing liabilities as well as the 22 basis point increase in interest-bearing liabilities. Average time deposits increased by $41.939 million or 18.71% over the prior year comparable quarter which drove up interest expense on time deposits by $357 thousand. The cost of interest-bearing demand deposits and repurchase agreements are up 39 basis points and 44 basis points respectively over the prior year comparable quarter as the Federal Reserve Bank continues to increase the target for the federal funds sold interest rate.
Other Income. Total other income for the six month period ended June 30, 2005 increased by $422 thousand or 24.64% compared to the same period in 2004. This increase is due to both security gains and an increase in fees from overdrafts and return check charges. Security gains amounted to $185 thousand during the first six months of 2005 and $0 during the same period in 2004. Various types of securities were sold and proceeds reinvested in order to improve the Corporation’s investment yield. Fees from overdrafts and return check charges increased by $201 thousand or 26.86% when comparing the first six months of 2005 to the first six months of 2004. Beginning in May of 2004, the Bank began to offer its customers a courtesy overdraft program.
Total other income for the quarter ended June 30, 2005 decreased by $4 thousand from the prior year comparable quarter. Security losses resulting from the previously mentioned sales amounted to $83 thousand for the quarter ended June 30, 2005 and $0 during the same period in 2004. Overdrafts and return check charges increased $55 thousand when comparing the second quarter of 2005 to the second quarter of 2004.
Other Expense. Other expense was $10.05 million for the first six months of 2005 compared to $9.56 million for the same time in 2004. This amounted to an increase of 5.04%. Salaries and employee benefits increased $421 thousand or 7.77%. Most of this increase was due to health insurance costs increasing $359 thousand or 44.21%. The efficiency ratio increased to 63.75% for the first six months of 2005 compared to 58.63% for the first six months of 2004. The efficiency ratio was adversely impacted by the $792 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 and keep the increases in other expenses to a minimum.
Other expense was $5.17 million for the quarter ended June 30, 2005 compared to $4.74 million for the same quarter in 2004. This increase of 9.06% occurred mainly in the area of salaries and employee benefits which increased $408 thousand or 15.3%. Health insurance costs increased $381 thousand or 106.7% over the prior year comparable quarter. The increase is due to higher levels of health insurance claims.
Income Taxes. Income tax expense totaled $1.46 million for the first six months of 2005 and $1.82 million for the first six months of 2004, a decrease of $358 thousand or 19.7%. The effective tax rate for the first six months of 2005 was 25.92% compared to 28.17% for the same time in 2004.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Income tax expense totaled $665 thousand for the quarter ended June 30, 2005 and $900 thousand for the quarter ended June 30, 2004, a decrease of 26.11%. This decrease is a result of the Corporation’s increased purchases of tax-exempt municipal securities combined with a decrease in pretax income.
Other Comprehensive Income. For the first six months of 2005, the change in net unrealized gains on securities, net of reclassifications, resulted in a loss of $920 thousand compared to a loss of $3.57 million for the same period in 2004. The losses were due to interest rate fluctuations affecting the market values of the entire investment portfolio.
Financial Condition
     Total assets increased $14.63 million or 1.79% since December 31, 2004. The Corporation experienced a decrease of $3.26 million in cash and cash equivalents, and increases in securities sold under repurchase agreements of $11.88 million and Federal Home Loan Bank advances of $2.56 million. These changes were used to fund net loan growth of $12.22 million and increase securities available for sale by $5.11 million. Capital ratios remain solid, as shown by the ratio of equity to total assets at June 30, 2005 of 9.51%.
Securities. Securities available for sale increased $5.11 million, or 1.81% during the six months ended June 30, 2005. An increase in securities of state and political subdivisions of $12.71 million was partially offset by a decrease in mortgage-backed securities of $4.65 million.
Loans. Gross loans increased $12.23 million or 2.52% since December 31, 2004. Commercial Real Estate loans grew $14.74 million or 10.39% since December 31, 2004. 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. In addition, municipal loans increased $3.45 million or 30.89%. This growth was partially offset by a decrease in Indirect Installment loans of $4.84 million or 3.79%. Loans contributed 73.23% of total interest income for the six months ended June 30, 2005 and 74.71% for the six months ended June 30, 2004.
Allowance for Loan Losses. The allowance for loan losses as a percentage of loans decreased slightly from 1.27% at December 31, 2004 to 1.24% at June 30, 2005. The provision for loan losses for the first six months of 2005 and 2004 was $269 thousand and $300 thousand, respectively. Net charge-offs totaled $260 thousand for the first six months of 2005 down from $553 thousand for the first six months of 2004. Net charge-offs were aided by a recovery of $250 thousand during the second quarter of 2005. During 2005, approximately 86% of charge-offs have occurred in the indirect
loan portfolio compared to 87% in 2004. Non-performing loans to total loans has increased slightly from .27% as of December 31, 2004 to .38% as of June 30, 2005.
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 $45 thousand since December 31, 2004. Time deposits increased $30.83 million since December 31, 2004. The growth in time deposits was offset by a decrease of $35.29 million in the money market index account. Funds shifted out of the money market index account and into the Common Sense Checking account which increased $18.65 million.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
This shift out of the money market index account was the result of a concerted effort by the Company to maintain an optimally priced deposit mix. Additionally, other savings accounts decreased $5.93 million since December 31, 2004. The Company prices deposit rates to remain competitive within the market and to attract and retain customers.
Borrowings. Total borrowings increased $14.24 million or 12.47% since December 31, 2004.
Securities sold under repurchase agreements increased $11.88 million. Due to the rising rate environment, customers are investing their money short-term in this account. Federal Home Loan Bank advances increased $2.56 million.
Capital Resources. Total stockholders’ equity increased slightly from $78.654 million at December 31, 2004 to $79.134 million at June 30, 2005. During the first six months of 2005, the Corporation received $2.28 million as proceeds from dividend reinvestment. In addition, the mark to market adjustment of securities decreased accumulated other comprehensive income (loss) by $920 thousand and the repurchase of treasury stock decreased stockholders’ equity by $901 thousand.
     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, 2005 the Corporation’s total risk-based capital ratio stood at 16.21%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 15.03% and 9.52%, respectively. Regulations established by the Federal Deposit Insurance Corporation Improvement Act require that for a bank to be considered well capitalized, it must have a total risk-based capital ratio of 10%, a Tier I risk-based capital ratio of 6% and a Tier I leverage ratio of 5%.
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 2004 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 are 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 are included in the notes to the aforementioned 2004 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 six months of 2005, net cash used in investing activities amounted to $20.07 million

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
compared to $2.88 million for the same period of 2004. Net increases in loans were $12.94 million in 2005 compared to $3.4 million in 2004. Security purchases, net of proceeds from maturities, repayments and sales totaled $6.95 million for the six month period ended June 30, 2005 compared to $1.05 million in net maturities and repayments for the six month period ended June 30, 2004.
     The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash provided by financing activities amounted to $11.47 million for the first six months of 2005 compared to $8.65 million used in financing activities for the same period in 2004. Most of this change is the result of a decrease in repayments on Federal Home Loan Bank borrowings and other debt which decreased to $7.16 million in 2005 compared to $21.84 million in 2004.
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 May 31, 2005 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, 2004. 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
     There are no material pending legal proceedings to which the registrant or its subsidiary is a party, or of which any of their property is the subject, except proceedings which arise in the ordinary course of business. In the opinion of management, pending legal proceedings will not have a material effect on the consolidated financial position of the registrant and its subsidiary.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of equity securities by the issuer.
On June 16, 2005, the Corporation announced the adoption of a stock repurchase program that authorizes the repurchase of up to 4.9% or approximately 637,469 shares of its outstanding common stock in the open market or in privately negotiated transactions. This program expires in June 2006.
The following table summarizes the treasury stock purchased by the issuer during the second quarter of 2005:
                                 
                    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
May 1-31
     7,290     $ 14.12       7,290       434,901  
June 1-30
     10,000     $ 14.90       10,000       627,469  
TOTAL
     17,290     $ 14.57       17,290          
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
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.

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Item 6. Exhibits (continued)
             
 
    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)

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          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 9, 2005
    
 
    
/s/Frank L. Paden
 
    
Frank L. Paden
    
President and Secretary
    
 
    
Dated: August 9, 2005
    
 
    
/s/Carl D. Culp
 
    
Carl D. Culp
    
Executive Vice President and Treasurer
    

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