UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the Quarter ended Sept. 30, 2004    Commission file number 2-80339

FARMERS NATIONAL BANC CORP.

(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  x  No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x  No  o

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Included in Part I of this report:

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

See accompanying notes to consolidated financial statements

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

See accompanying notes to consolidated financial statements

2

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

See accompanying notes to consolidated financial statements

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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 2003 Annual Report to Shareholders included in the Company’s 2003 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 credit 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)

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, including the adjustable rate U.S. Government agency preferred stock included in equity securities. 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:

Share and per share information has been restated to reflect the impact of stock dividends. On October 12, 2004, the Board of Directors declared a 2% stock dividend payable on November 30, 2004 to all shareholders of record on November 12, 2004.

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Notes to Unaudited Consolidated Financial Statements (continued)

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.

Reclassifications:

     Certain items in the prior year financial statements were reclassified to conform to the current presentation.

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. 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

Comparison of the Three and Nine Months Ended September 30, 2004 and 2003

     The Corporation’s net income for the first nine months of 2004 was $7.047 million, or $.54 per diluted share, which is a .34% decrease compared with the $7.071 million, or $.55 per diluted share earned during the same period last year. During the third quarter of 2004, net income was $2.415 million, or $.19 per diluted share, which is a 1.11% decrease compared with the $2.442 million, or $.19 per diluted share earned during the same period last year. The Corporation’s return on average assets and return on average equity for the twelve month period ended September 30, 2004 was 1.17% and 11.96% respectively, compared to 1.20% and 11.52% for the same period in 2003.

Net Interest Income. Net interest income for the first nine months of 2004 totaled $21.86 million, a decrease of $252 thousand or 1.14% compared to the first nine months of 2003. Interest income decreased $1.47 million or 4.46%, when comparing the first nine months of 2004 to the first nine months of 2003. Average earning assets increased $24.91 million or 3.37%, when comparing the period ended September 30, 2004 to September 30, 2003, but this growth was offset by a 44 basis point decrease in the annualized tax equated yield on earning assets. Even though average loans increased $13.94 million during the same period, this was offset by a 65 basis point decrease in the annualized loan yield.

     Although the average balances of interest-bearing liabilities increased $22.08 million when comparing the period ended September 30, 2004 to September 30, 2003, interest expense decreased $1.21 million or 11.31% during this same period. The decline in interest expense was mainly due to a 31 basis point decrease in the annualized rates paid on interest-bearing liabilities, caused by a

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

general decline in interest rates. While the average balance of time deposits increased $19.05 million when comparing September 30, 2004 to September 30, 2003, the annualized rate paid decreased by 24 basis points. During the same period, savings deposits had a 33 basis point decrease in annualized rates paid and repurchase agreements had a 105 basis point decrease in annualized rates paid. The decrease in the annualized yield on earning assets lowered our tax equated annualized net interest margin from 4.12% for the period ended September 30, 2003 to 3.96% for the period ended September 30, 2004. Management will continue to evaluate future interest rate hikes 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 September 30, 2004 totaled $7.26 million, a decrease of $207 thousand or 2.77% compared to the quarter ended September 30, 2003. While interest expense decreased $173 thousand or 5.15%, interest income decreased $380 thousand or 3.51%.

Other Income. Total other income for the nine month period ended September 30, 2004 increased by $538 thousand or 24.04% compared to the same period in 2003. This increase is due to a $435 thousand increase in overdrafts and return check charges. During the second quarter of 2004, the Bank began to offer its customers a courtesy overdraft program.

     Additionally, there was a $133 thousand increase in commissions on non-deposit investment products. As the equity markets continue to improve, the Bank has experienced increased levels of customer activity in this area. Management anticipates this trend will continue in the future.

     Total other income for the quarter ended September 30, 2004 increased by $282 thousand or 36.11% from the prior year comparable quarter. Most of this increase is due to the previously mentioned courtesy overdraft program. Overdrafts and return check charges increased $237 thousand when comparing the third quarter of 2004 to the third quarter of 2003.

Other Expense. Other expense was $14.31 million for the first nine months of 2004 compared to $13.67 million for the same time in 2003. This increase of 4.67% mostly occurred in the area of other operating expenses. Advertising expense increased $124 thousand or 49.45%. The increase in advertising was due to a focused short-term advertising campaign and the Corporation does not expect these increases to continue. The efficiency ratio increased to 58.08% for the first nine months of 2004 compared to 56.14% for the first nine months of 2003. 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 $4.75 million for the quarter ended September 30, 2004 compared to $4.6 million for the same quarter in 2003. This increase of 3.11% occurred mainly in the area of other operating expenses. Advertising expense increased $47 thousand or 55.29%. Salaries and employee benefits decreased by $28 thousand when comparing the third quarter of 2004 to the same period in 2003. While salaries and temporary wages increased $112 thousand or 5.96%, employee health insurance costs decreased $140 thousand or 28.51% over the prior year comparable quarter. The decrease is due to lower levels of health insurance claims.

Income Taxes. Income tax expense totaled $2.74 million for the first nine months of 2004 and $2.95 million for the first nine months of 2003, a decrease of $209 thousand or 7.09%. The effective tax rate for the first nine months of 2004 was 28% compared to 29.43% for the same time in 2003.

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

     Income tax expense totaled $923 thousand for the quarter ended September 30, 2004 and $1.01 million for the quarter ended September 30, 2003, a decrease of 8.97%.

Other Comprehensive Income. For the first nine months of 2004, the change in net unrealized gains on securities, net of reclassifications, resulted in a loss of $1.52 million and a loss of $2.84 million for the same period in 2003. The changes in 2003 and 2004 were due to interest rate fluctuations affecting the market values of the entire investment portfolio.

Financial Condition

     Total assets decreased $2.78 million or .34% since December 31, 2003. The Corporation had decreases of $3.11 million in cash and cash equivalents, $10.26 million in securities available for sale and an increase of $5 million in borrowings. These changes were used to fund increases of $8.78 million in net loans, $1.97 million in other assets and a decrease of $6.93 million in deposits. Capital ratios remain solid, as shown by the ratio of equity to total assets at September 30, 2004 of 9.84%.

Securities. Securities available for sale decreased $10.26 million, or 3.51% during the nine months ended September 30, 2004. This decrease was a combination of paydowns, net of purchases on mortgage-backed securities of $8.59 million and maturities and repayments, net of purchases on federal agency securities of $8.96 million. These decreases were somewhat offset by an increase in securities and loans to state and political subdivisions of $10.49 million.

Loans. Gross loans increased $8.29 million or 1.75% since December 31, 2003. Most of this increase occurred in the Commercial Real Estate Portfolio. Commercial Real Estate grew $11.38 million or 9.02% since December 31, 2003. 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 begins to recover. Loans contributed 73.71% of total interest income for the nine months ended September 30, 2004 and 75.06% for the nine months ended September 30, 2003.

Allowance for Credit Losses. The allowance for credit losses as a percentage of loans decreased from 1.41% at December 31, 2003 to 1.28% at September 30, 2004. The provision for credit losses for the first nine months of 2004 and 2003 was $540 thousand and $660 thousand, respectively. The provision has decreased due to changes in portfolio composition. As the portfolio composition has shifted, management’s analysis indicates there is reduced exposure to probable losses. Net charge-offs totaled $1.04 million for the first nine months of 2004 up from $625 thousand for the first nine months of 2003. Approximately 87% of the net charge-offs have occurred in the indirect loan portfolio. Annualized net charge-offs to average loans for the first nine months of 2004 was .29% compared to .18% for the first nine months of 2003. Non-performing loans to total loans increased slightly from .32% as of December 31, 2003 to .33% as of September 30, 2004.

     The provision for 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.

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

Deposits. Total deposits decreased $6.93 million or 1.11% since December 31, 2003. The decrease in the deposit portfolio came predominantly in the money market index account, which declined $10.43 million since December 31, 2003. This shift out of the money market index account was due to a concerted effort by the Company to have a better deposit mix. Additionally, noninterest-bearing deposits decreased $3.07 million and money market checking accounts increased $5.35 million. The Company prices deposit rates to remain competitive within the market and to attract and retain customers.

Borrowings. Total borrowings increased $5 million or 4.86% since December 31, 2003. This increase was due to an $18.33 million increase in securities sold under repurchase agreements. The growth in securities sold under repurchase agreements is a combination of growth from new customers and the rising rate environment. Due to the rising rate environment, customers are investing their money short-term in this account. Federal Home Loan Bank advances decreased $13.42 million, mainly as the result of paying off a $15 million Federal Home Loan Bank advance that matured during the nine month period.

Capital Resources. Total Stockholders’ Equity decreased $541 thousand or .67% since December 31, 2003. During the first nine months of 2004, the Corporation received $3.49 million as proceeds from dividend reinvestment. In addition, the mark to market adjustment of securities decreased accumulated other comprehensive income (loss) by $1.52 million. Treasury stock increased by $3.49 million as the Corporation continues to utilize the stock repurchase program.

     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 September 30, 2004 the Corporation’s total risk-based capital ratio stood at 16.58%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 15.37% and 9.56%, 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 2003 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 one accounting policy that is a critical accounting policy and an understanding of this policy is necessary to understand our financial statements. This policy relates to determining the adequacy of the allowance for credit losses. Additional information regarding this policy is included in the section captioned “Allowance for Credit Losses”.

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

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

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 nine months of 2004 net cash used in investing activities amounted to $4.45 million compared to $64.36 million for the same period of 2003. Net increases in loans were $10.29 million in 2004 compared to $15.34 million in 2003. Proceeds from security maturities and repayments, net of securities purchases, totaled $6.43 million for the nine month period ended September 30, 2004 compared to $46.32 million in net purchases for the nine month period ended September 30, 2003.

     The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash used in financing activities amounted to $8.49 million for the first nine months of 2004 compared to $51.85 million provided by financing activities for the same period in 2003. A net decrease in deposits used $6.93 million in 2004 and a net increase provided $36.2 million in 2003. In addition, a net increase in short-term borrowings provided $18.47 million in 2004 compared to $16.08 million in 2003. Net proceeds and repayments on Federal Home Loan Bank borrowings and other debt used $13.47 million in 2004 and provided $5.45 million in 2003.

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 August 31, 2004 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, 2003. 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-14(c) and 15d-14(c) 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

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Item 4. Controls and Procedures (continued)

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.

Item 2. Changes in Securities

Purchases of equity securities by the issuer.

On May 14, 2004, The Corporation announced the adoption of a stock repurchase program that authorizes the re-purchase of up to 4.9% or approximately 620,275 shares of its outstanding common stock in the open market or in privately negotiated transactions. This program expires in May 2005. The following table summarizes the treasury stock purchased by the issuer during the third quarter of 2004:

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 reference as part of this report:

2.

Not applicable.

        3(i). Not applicable.

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Item 6. Exhibits and Reports on Form 8-K (continued)

     3(ii). Not applicable.

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.

10.		Not applicable.
11.		Not applicable.
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)

(b) - Reports on Form 8-K

     Two Form 8-K’s were filed during the third quarter of 2004. The first Form 8-K was dated July 22, 2004 and reported the earnings for the first six months of 2004.

     The second Form 8-K was dated August 12, 2004 and announced the declaration of a regular quarterly dividend.

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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: November 8, 2004

/s/ Frank L. Paden

Frank L. Paden
President and Secretary

Dated: November 8, 2004

/s/ Carl D. Culp

Carl D. Culp
Executive Vice President
and Treasurer

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