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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934

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      X        No            

Indicate the number of shares outstanding of each of the issuer’s classes or common stock, as of the latest practicable date.

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PART I — FINANCIAL INFORMATION

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CONSOLIDATED BALANCE SHEETS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

*     Restated to reflect weighted average shares outstanding.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

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FARMERS NATIONAL BANC CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Management Representation:

     The financial statements for June 30, 2002 and 2001 have been prepared by management without audit and, therefore, have not been certified by our Independent Certified Public Accountants.

     In the opinion of the management of the registrant, the accompanying consolidated financial statements for the six month period ending June 30, 2002 and 2001 include all adjustments, consisting of only normal recurring adjustments necessary for a fair statement of the results for the periods.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

     The following financial review presents an analysis of the assets and liability structure of the Corporation and a discussion of the results of operations for each of the periods presented in this quarterly report of liquidity, capital and credit quality. Certain statements in this report that relate to Farmers National Banc Corp.’s plans, objectives, or future performance may be deemed to be forward-looking statements within the Private Securities Litigation Reform Act of 1995. Such statements are based on management’s current expectations. Actual strategies and results in future periods may differ materially from those currently expected because of various risks and uncertainties.

     Among the important factors that could cause actual results to differ materially are interest rates, changes in the mix of the company’s business, competitive pressures, general economic conditions and the risk factors detailed in the company’s other periodic reports and registration statements filed with the Securities and Exchange Commission.

Results of Operations

     The Corporation’s net income for the first six months of 2002 was $3.415 million, or $.28 per share, which is a 5.2% decrease compared with the $3.603 million, or $.30 per share earned during the same period last year. Return on average assets and return on average equity for the first six months of 2002 were 1.07% and 9.87% respectively, compared to 1.15% and 10.05% for the same period in 2001.

     The decrease in net income for the first six months of 2002 was the result of an increase in non-interest operating expenses and the narrowing of margins. Net interest income increased slightly while total other expenses increased $521 thousand or 6.4% compared to last year. As average loan balances decreased 1.33% over the past twelve months, loan yields also decreased from 8.05% in 2001 to 7.40% in 2002. This combination of decreasing balances and declining yields dropped loan income by $1.437 million or 7.65%. Although the average balance of securities and federal funds sold increased 32.59%, this increase was partially offset by a drop in its’ yield from 6.36% in 2001 to 4.82% in 2002.

     Interest expense on deposits and borrowings dropped $1.706 million or 15.70% over the same time period. During 2002, average deposits increased $37.511 million or 7.84% while the rates paid on deposits decreased from 3.77% in 2001 to 2.95% in 2002. The net effect of these rate and volume changes was a decrease in deposit interest expense of $1.395 million or 15.58%. Borrowing expense decreased $311 thousand or 16.26% compared to last year. This decrease is primarily the result of lower borrowing rates declining from 5.30% in 2001 to 4.10% in 2002.

     In 2002, investment security gains amounted to $153 thousand, compared to $25 thousand in 2001. Total other expenses increased from $8.169 million in 2001 to $8.690 million in 2002. Salaries and employee benefits increased $350 thousand or 7.99% compared to last year, primarily as a result of an increase in full-time equivalent employees. Other operating expenses also increased $151 thousand or 6.72%. The increase in full-time equivalent employees and other operating expenses is directly attributable to our growth in assets over the past twelve months. Management will continue to closely monitor noninterest expenses.

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Results of Operations (Continued)

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.

     Principal sources of liquidity for the Corporation include assets considered relatively liquid such as short-term investment securities, federal funds sold and cash and due from banks.

     Cash flows generated from operating activities decreased to $4.598 million compared to $4.875 million for the same period in 2001. This decrease of $277 thousand is mainly the result of a decrease in net interest received. Net cash flows used in investing activities amounted to $61.718 million in 2002 compared to $3.995 million provided by investing activities for the same period in 2001. Most of the current period’s decrease came from both purchases of investment securities and new loan growth outpacing repayments of loans made to customers.

     Net cash flows provided by financing activities were $37.588 million in 2002 compared to $297 thousand in 2001. In 2002, $32.121 million was generated from increases in deposits.

Capital Resources

     The capital management function is a continuous process which consists of providing capital for both the current financial position and the anticipated future growth of the Corporation. As of June 30, 2002 the Corporation’s total risk-based capital ratio stood at 17.52%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 16.24% and 10.72%, 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%.

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Loan Portfolio

     The following shows the composition of loans at the dates indicated:

     The following table sets forth aggregate loans in each of the following categories for the dates indicated:

Management knows of no loans not included in the table above where serious doubt exists as to the ability of the borrower to comply with the current loan repayment terms.

The following shows the amounts of contracted interest income and interest income reflected in income on loans accounted for on a nonaccrual basis and loans considered troubled debt restructuring for the periods indicated:

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Risk Elements (Continued)

A loan is placed on a nonaccrual basis whenever sufficient information is received to question the collectibility of the loan. Generally, once a loan is placed on a nonaccrual basis, interest that may be accrued and not collected on the loan is charged against earnings.

As of June 30, 2002, there were no concentrations of loans exceeding 10% of total loans which are not disclosed as a category of loans. As of that date also, there are no other interest-earning assets that are either nonaccrual, past due or restructured.

Summary of Credit Loss Experience

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

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Summary of Credit Loss Experience (cont’d)

(1)  The provision for possible credit losses charged to operating expense 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.

The allowance for possible credit losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories of loans as of the dates indicated.

The allocation of the allowance as shown above should not be interpreted as an indication that charge-offs in 2002 will occur in the same proportions or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.

The percentage of loans in each category to total loans is summarized as follows:

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There are no material changes from the end of the preceding fiscal year that would cause additional disclosure of the bank’s exposure to market risk.

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.

Item 2. Changes in Securities

	Not applicable.

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 and Reports on Form 8-K

(a)  The following exhibits are filed or incorporated by references as part of this report:

     4.     The registrant agrees to furnish to the Commission upon request copies of all instruments not filed herewith defining the rights of holders of long-term debt of the registrant and its subsidiaries.

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(b)  - Reports on Form 8-K

         No reports on Form 8-K were filed for the three months ended June 30, 2002.

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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 13, 2002

/s/ Frank L. Paden

Dated: August 13, 2002

/s/ Carl D. Culp

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