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, 2010

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
(Address of principal executive offices)		(Zip Code)

(330) 533-3341

Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

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

Class		Outstanding at April 30, 2010
Common Stock, No Par Value		13,546,248 shares

 

 

		Page Number
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Included in Part I of this report:
Farmers National Banc Corp. and Subsidiaries
Consolidated Balance Sheets			1
Consolidated Statements of Income and Comprehensive Income			2
Consolidated Statements of Cash Flows			3
Notes to Unaudited Consolidated Financial Statements			4-14
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			15-22
Item 3 Quantitative and Qualitative Disclosures About Market Risk			22-23
Item 4 Controls and Procedures			23
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			23
Item 1A Risk Factors			23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			23
Item 3 Defaults Upon Senior Securities			23
Item 4 Other Information			24
Item 5 Exhibits			24
SIGNATURES			25
10-Q Certifications
Section 906 Certifications
Exhibit 31.a
Exhibit 31.b
Exhibit 32.a
Exhibit 32.b

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

		(In Thousands of Dollars)
		March 31,				December 31,
		2010				2009
ASSETS
Cash and due from banks		$	23,056			$	25,713
Federal funds sold			46,838				25,447
TOTAL CASH AND CASH EQUIVALENTS			69,894				51,160
Securities available for sale			316,370				309,368
Loans			609,135				609,395
Less allowance for loan losses			8,220				7,400
NET LOANS			600,915				601,995
Premises and equipment, net			14,396				14,193
Bank owned life insurance			11,564				11,438
Goodwill			3,709				3,709
Other intangibles			3,646				3,791
Other assets			19,717				19,154
TOTAL ASSETS		$	1,040,211			$	1,014,808
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		$	68,394			$	68,420
Interest-bearing			708,401				709,132
TOTAL DEPOSITS			776,795				777,552
Short-term borrowings			152,205				125,912
Long-term borrowings			25,520				27,169
Other liabilities			3,434				3,547
TOTAL LIABILITIES			957,954				934,180
Commitments and contingent liabilities
Stockholders’ Equity:
Common Stock — Authorized 25,000,000 shares; issued 15,599,359 in 2010 and 15,572,703 in 2009			95,770				95,650
Retained earnings			7,579				7,137
Accumulated other comprehensive income (loss)			4,411				3,344
Treasury stock, at cost; 2,053,111 shares in 2010 and 2,053,098 in 2009			(25,503	)			(25,503	)
TOTAL STOCKHOLDERS’ EQUITY			82,257				80,628
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,040,211			$	1,014,808

See accompanying notes

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

		(In Thousands except Per Share Data)
		For the Three Months Ended
		March 31,				March 31,
		2010				2009
INTEREST AND DIVIDEND INCOME
Loans, including fees		$	9,232			$	9,036
Taxable securities			2,241				2,296
Tax exempt securities			591				586
Dividends			53				70
Federal funds sold			9				6
TOTAL INTEREST AND DIVIDEND INCOME			12,126				11,994
INTEREST EXPENSE
Deposits			2,745				3,289
Short-term borrowings			285				505
Long-term borrowings			282				517
TOTAL INTEREST EXPENSE			3,312				4,311
NET INTEREST INCOME			8,814				7,683
Provision for loan losses			2,778				450
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			6,036				7,233
NONINTEREST INCOME
Service charges on deposit accounts			478				599
Bank owned life insurance income			126				131
Trust fees			1,232				0
Insurance agency commissions			62				0
Other operating income			438				388
TOTAL NONINTEREST INCOME			2,336				1,118
NONINTEREST EXPENSES
Salaries and employee benefits			3,977				3,020
Occupancy and equipment			925				850
State and local taxes			232				213
Professional fees			309				215
Advertising			130				100
FDIC insurance			303				231
Merger related costs			0				453
Intangible amortization			145				0
Core processing charges			239				19
Other operating expenses			1,272				1,155
TOTAL NONINTEREST EXPENSES			7,532				6,256
INCOME BEFORE INCOME TAXES			840				2,095
INCOME TAXES			(7	)			411
NET INCOME		$	847			$	1,684
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Change in net unrealized gains (losses) on securities, net of reclassifications			1,067				792
COMPREHENSIVE INCOME		$	1,914			$	2,476
NET INCOME PER SHARE-basic and diluted		$	0.06			$	0.13
DIVIDENDS PER SHARE		$	0.03			$	0.12

See accompanying notes

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

		(In Thousands of Dollars)
		Three Months Ended
		March 31,				March 31,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	847			$	1,684
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan losses			2,778				450
Depreciation and amortization			428				258
Net amortization of securities			250				79
Loss on sale of other real estate owned			49				0
Increase in bank owned life insurance			(126	)			(131	)
Net change in other assets and liabilities			(1,525	)			363
NET CASH FROM OPERATING ACTIVITIES			2,701				2,703
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and repayments of securities available for sale			13,145				13,268
Purchases of securities available for sale			(18,803	)			(9,422	)
Purchase of trust entity, net			0				(10,511	)
Loan originations and payments, net			(1,773	)			(17,873	)
Proceeds from sale of other real estate owned			323				20
Additions to premises and equipment			(461	)			(136	)
NET CASH FROM INVESTING ACTIVITIES			(7,569	)			(24,654	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits			(757	)			27,592
Net change in short-term borrowings			26,293				30,623
Net change in Federal Home Loan Bank borrowings and other debt			(1,649	)			(1,974	)
Cash dividends paid			(405	)			(1,588	)
Proceeds from dividend reinvestment			120				467
NET CASH FROM FINANCING ACTIVITIES			23,602				55,120
NET CHANGE IN CASH AND CASH EQUIVALENTS			18,734				33,169
Beginning cash and cash equivalents			51,160				24,049
Ending cash and cash equivalents		$	69,894			$	57,218
Supplemental cash flow information:
Interest paid		$	3,481			$	4,377
Income taxes paid		$	0			$	0
Supplemental noncash disclosures:
Transfer of loans to other real estate		$	75			$	215

See accompanying notes

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

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

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2009 Annual Report to Shareholders included in the Company’s 2009 Annual Report on Form 10-K. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. 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, carrying amount of goodwill and fair values of financial instruments 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 primarily aggregated and reported in two lines of business, the Bank segment and the Trust segment.

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at March 31, 2010 and December 31, 2009 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

						Gross				Gross
(In Thousands of Dollars)		Amortized				Unrealized				Unrealized				Fair
March 31, 2010		Cost				Gains				Losses				Value
U.S. Treasury and U.S. government-sponsored entities		$	117,433			$	1,779			$	(94	)		$	119,118
States and political subdivisions			61,969				1,346				(306	)			63,009
Mortgage-backed securities — residential			129,579				4,193				(270	)			133,502
Collateralized mortgage obligations			205				6				0				211
Equity securities			149				128				(15	)			262
Other securities			250				18				0				268
Totals		$	309,585			$	7,470			$	(685	)		$	316,370

(In Thousands of Dollars)
December 31, 2009
U.S. Treasury and U.S. government-sponsored entities		$	98,746			$	1,424			$	(337	)		$	99,833
States and political subdivisions			62,809				1,070				(447	)			63,432
Mortgage-backed securities — residential			141,915				3,758				(411	)			145,262
Collateralized mortgage obligations			309				9				0				318
Equity securities			149				129				(19	)			259
Other securities			250				14				0				264
Totals		$	304,178			$	6,404			$	(1,214	)		$	309,368

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage backed securities are not due at a single maturity date and are shown separately.

		March 31, 2010
(In Thousands of Dollars)		Amortized				Fair
Maturity		Cost				Value
Within one year		$	4,651			$	4,683
One to five years			111,371				113,104
Five to ten years			33,189				33,945
Beyond ten years			30,441				30,663
Mortgage-backed and CMO securities			129,784				133,713
Total		$	309,436			$	316,108

		December 31, 2009
(In Thousands of Dollars)		Amortized				Fair
Maturity		Cost				Value
Within one year		$	3,538			$	3,563
One to five years			92,162				93,357
Five to ten years			35,177				35,777
Beyond ten years			30,928				30,832
Mortgage-backed and CMO securities			142,224				145,580
Total		$	304,029			$	309,109

The following table summarizes the investment securities with unrealized losses at March 31, 2010 and December 31, 2009 aggregated by major security type and length of time in a continuous unrealized loss position:

		Less Than 12 Months								12 Months or Longer								Total
(In Thousands of Dollars)		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
March 31, 2010		Value				Losses				Value				Losses				Value				Losses
Available-for-sale
U.S. Treasury and U.S. gov- ernment-sponsored entities		$	25,224			$	(86	)		$	347			$	(8	)		$	25,571			$	(94	)
States and political subdivisions			6,001				(82	)			3,098				(224	)			9,099				(306	)
Mortgage-backed securities — residential			18,724				(269	)			58				(1	)			18,782				(270	)
Equity securities			0				0				9				(15	)			9				(15	)
Total		$	49,949			$	(437	)		$	3,512			$	(248	)		$	53,461			$	(685	)

(In Thousands of Dollars)
December 31, 2009
Available-for-sale
U.S. Treasury and U.S. gov- ernment-sponsored entities		$	44,854			$	(330	)		$	359			$	(7	)		$	45,213			$	(337	)
States and political subdivisions			13,336				(162	)			3,035				(285	)			16,371				(447	)
Mortgage-backed securities — residential			40,304				(410	)			60				(1	)			40,364				(411	)
Equity securities			28				(3	)			7				(16	)			35				(19	)
Total		$	98,522			$	(905	)		$	3,461			$	(309	)		$	101,983			$	(1,214	)

There were no security sales during either the first quarter of 2010 or 2009.

Other-Than-Temporary-Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for OTTI under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, or U.S. Government sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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

As of March 31, 2010, the Company’s security portfolio consisted of 432 securities, 57 of which were in an unrealized loss position. The majority of the unrealized losses on the Corporation’s securities are related to its holdings of U.S. Government-sponsored entities, state and political subdivisions, and mortgage-backed securities as discussed below.

Unrealized losses on debt securities issued by the U.S. Government-sponsored entities have not been recognized into income because the securities are of high credit quality, management does not have the intent to sell these securities before their anticipated recovery and the decline in fair value is largely due to fluctuations in market interest rates and not credit quality. The fair value is expected to recover as the securities approach their maturity date.

Unrealized losses on debt securities at March 31, 2010 on the Company’s obligations of states and political subdivisions have not been recognized into income. Generally these securities have maintained their investment grade ratings and management does not have the intent to sell these securities before their anticipated recovery which may be at maturity.

All of the Company’s holdings of mortgage-backed securities were issued by U.S. Government sponsored enterprises. Unrealized losses on mortgage-backed securities have not been recognized into income. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired.

Loans:

Loan balances were as follows:

		March 31,				December 31,
(In Thousands of Dollars)		2010				2009
Residential real estate		$	180,719			$	180,877
Commercial real estate			215,877				215,917
Consumer			132,196				136,708
Commercial			80,343				75,893
Subtotal			609,135				609,395
Allowance for loan losses			(8,220	)			(7,400	)
Net loans		$	600,915			$	601,995

Activity in the allowance for loan losses was as follows:

		Three months ended
		March 31,
(In Thousands of Dollars)		2010				2009
Balance at beginning of period		$	7,400			$	5,553
Provision for loan losses			2,778				450
Recoveries			147				130
Loans charged off			(2,105	)			(298	)
Balance at end of period		$	8,220			$	5,835

Individually impaired loans were as follows:

		March 31,				December 31,
(In Thousands of Dollars)		2010				2009
Loans with no allocated allowance for loan losses		$	4,007			$	425
Loans with allocated allowance for loan losses			5,318				13,071
		$	9,325			$	13,496
Amount of the allowance for loan losses allocated		$	2,263			$	2,058

Impaired loans decreased during the first quarter of this year due mainly to two loan relationships that were classified as non-performing troubled debt restructurings at December 31, 2009, that are now performing to their new contractual terms and have been removed from this category at March 31, 2010.

Included in the $9.33 million disclosed above at March 31, 2010 are $2.80 million of loans that have terms that have been modified under troubled debt restructuring. The Company has allocated $122 thousand of specific reserves to those loans at March 31, 2010. At December 31, 2009, $5.44 million of loans that have terms that have been modified under troubled debt restructuring are included in the $13.50 million of individually impaired loans. The Company has allocated $333 thousand of specific reserves to those loans at December 31, 2009.

Interest income recognized during impairment for the periods was immaterial.

Nonperforming loans were as follows:

		March 31,				December 31,
(In Thousands of Dollars)		2010				2009
Nonaccrual loans:
Residential real estate		$	2,693			$	2,281
Commercial real estate			4,083				5,677
Consumer			84				172
Commercial			3,369				1,504
Total Nonaccrual Loans			10,229				9,634
Loans past due over 90 days still on accrual			511				469
Total nonperforming loans		$	10,740			$	10,103
Other real estate owned			77				374
Total nonperforming assets		$	10,817			$	10,477
Percentage of nonperforming loans to gross loans			1.76	%			1.66	%
Percentage of nonperforming assets to total assets			1.04	%			1.03	%

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 Share and Per Share Data)		2010				2009
Basic EPS computation
Numerator — Net income		$	847			$	1,684
Denominator — Weighted average shares outstanding			13,519,888				13,231,653
Basic earnings per share		$	.06			$	.13
Diluted EPS computation
Numerator — Net income		$	847			$	1,684
Denominator — Weighted average shares outstanding for basic earnings per share			13,519,888				13,231,653
Effect of Stock Options			0				0
Weighted averages shares for diluted earnings per share			13,519,888				13,231,653
Diluted earnings per share		$	.06			$	.13

Stock options for 34,000 and 42,000 shares were not considered in the computing of diluted earnings per share for 2010 and 2009 respectively because they were antidilutive.

Stock Based Compensation:

The Company’s Stock Option Plan permitted the grant of share options to its directors, officers and employees. Under the terms of the Plan no additional shares can be issued. Option awards were granted with an exercise price equal to the market price of the Company’s common stock at the date of grant, those option awards have vesting periods of 5 years and have 10-year contractual terms. At March 31, 2010 there were 34,000 outstanding options of which 30,000 are fully vested and are exercisable.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Total compensation cost charged against income for the stock option plan for the quarter ended March 31, 2010 was not material. No related income tax benefit was recorded.

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income consists solely of the change in unrealized gains and losses on securities available for sale, net of reclassification for gains recognized in income.

Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (ASC 810). The new accounting requirement amends previous guidance relating to the transfers of financial assets and eliminates the concept of a qualifying special-purpose entity. ASC 810 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. ASC 810 must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of ASC 810 were also amended and apply to transfers that occurred both before and after the effective date of ASC 810. The adoption of ASC 810 did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (ASC 810), which amended guidance for consolidation of variable interest entities by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and has (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This statement requires additional disclosures about an enterprise’s involvement in variable interest entities. This statement will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of the accounting guidance did not have an impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued an amendment to, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures About Fair Value Measurements. This amendment requires new disclosures regarding significant transfers in and out of Level 1 and 2 fair value measurements and the reasons for the transfers. This amendment also requires that a reporting entity should present separately information about purchases, sales, issuances and settlements, on a gross basis rather than a net basis for activity in Level 3 fair value measurements using significant unobservable inputs. This amendment also clarifies existing disclosures on the level of disaggregation, in that the reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities, and that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and 3. The new disclosures and clarifications of existing disclosures for ASC 820 are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASC 820 did not have a material effect on the Company’s consolidated financial statements.

Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Assets and Liabilities Measured on a Recurring Basis

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

						Fair Value Measurements at
						March 31, 2010 Using:
										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
(In Thousands of Dollars)		Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Investment securities available-for sale
U.S. Treasury and U.S. Government sponsored entities		$	119,119			$	0			$	119,119			$	0
States and political subdivisions			63,008				0				63,008				0
Mortgage-backed securities-residential			133,502				0				133,489				13
Collateralized mortgage obligations			211				0				211				0
Equity securities			262				262				0				0
Other securities			268				0				268				0
Total investment securities		$	316,370			$	262			$	316,095			$	13

						Fair Value Measurements at
						December 31, 2009 Using:
										Significant
						Quoted Prices in				Other				Significant
						Active Markets for				Observable				Unobservable
		Carrying				Identical Assets				Inputs				Inputs
(In Thousands of Dollars)		Value				(Level 1)				(Level 2)				(Level 3)
Financial Assets
Investment securities available-for sale
U.S. Treasury and U.S. Government sponsored entities		$	99,833			$	0			$	99,833			$	0
States and political subdivisions			63,432				0				63,432				0
Mortgage-backed securities-residential			145,262				0				145,249				13
Collateralized mortgage obligations			318				0				318				0
Equity securities			259				259				0				0
Other securities			264				0				264				0
Total investment securities		$	309,368			$	259			$	309,096			$	13

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis:

		Investment Securities
		Available-for-sale
Three months ended March 31, 2010		(Level 3)
Balance at January 1, 2010		$	13
Total unrealized gains or losses:
Included in other comprehensive income			0
Purchases, sales, issuances and settlements, net			0
Transfer in and/or out			0
Balance at March 31, 2010		$	13

Assets and Liabilities Measured on a Non-Recurring Basis

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

Fair Value Measurements

at March 31, 2010 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

—

—

$

1,886

Fair Value Measurements

at December 31, 2009 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

—

—

$

5,904

The following represent impairment charges recognized during the period:

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4.00 million with a valuation allowance of $2.14 million, resulting in an additional provision for loan loss of $1.51 million for the period. The allowance for loan loss is based on management’s judgment after considering factors such as expected future cash flows on impaired loans, historical loss experience, and current economic conditions. Management believes the allowance for loan loss to be adequate at March 31, 2010.

The carrying amounts and estimated fair values of financial instruments, at March 31, 2010 and December 31, 2009 are as follows:

(In Thousands of Dollars)		Carrying				Fair
March 31, 2010		Amount				Value
Financial assets
Cash and cash equivalents		$	69,894			$	69,894
Securities available-for-sale			316,370				316,370
Restricted stock			3,977				n/a
Loans, net			600,915				609,903
Accrued interest receivable			4,634				4,634
Financial liabilities
Deposits			776,795				780,134
Short-term borrowings			152,205				152,205
Long-term borrowings			25,520				27,389
Accrued interest payable			1,086				1,086

(In Thousands of Dollars)		Carrying				Fair
December 31, 2009		Amount				Value
Financial assets
Cash and cash equivalents		$	51,160			$	51,160
Securities available-for-sale			309,368				309,368
Restricted stock			3,977				n/a
Loans, net			601,995				609,127
Accrued interest receivable			4,370				4,370
Financial liabilities
Deposits			777,552				781,703
Short-term borrowings			125,912				125,912
Long-term borrowings			27,169				28,990
Accrued interest payable			1,155				1,155

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

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

Segment Information

A reportable segment is determined by the products and services offered, primarily distinguished between banking and trust operations. They are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated. Loans, investments, and deposits provide the revenues in the banking operation, and trust service fees provide the revenue in trust operations. All operations are domestic.

Significant segment totals are reconciled to the financial statements as follows:

		Trust				Bank								Consolidated
March 31, 2010		Segment				Segment				Others				Totals
Assets
Cash and due from banks		$	619			$	69,293			$	(18	)		$	69,894
Securities available for sale			4,028				312,215				127				316,370
Net loans			0				600,915				0				600,915
Premises and equipment, net			126				14,270				0				14,396
Goodwill			3,709				0				0				3,709
Other intangibles			3,646				0				0				3,646
Other assets			612				30,273				396				31,281
Total Assets		$	12,740			$	1,026,966			$	505			$	1,040,211
Liabilities and Stockholders’ Equity
Deposits, borrowings and other liabilities		$	442			$	956,552			$	960			$	957,954
Stockholders’ equity			12,298				70,414				(455	)			82,257
Total Liabilities and Stockholders’ Equity		$	12,740			$	1,026,966			$	505			$	1,040,211

		Trust				Bank								Consolidated
For period ending March 31, 2010		Segment				Segment				Others				Totals
Interest and dividend income		$	19			$	12,106			$	1			$	12,126
Interest expense			0				3,303				9				3,312
Net interest income			19				8,803				(8	)			8,814
Provision for loan losses			0				2,778				0				2,778
Net interest income after provision for loan losses			19				6,025				(8	)			6,036
Service fees and other noninterest income			1,232				1,068				36				2,336
Noninterest expense Salaries and employee benefits			650				3,300				27				3,977
Occupancy and equipment			124				801				0				925
State and local taxes			30				201				1				232
Professional fees			15				294				0				309
Advertising			2				130				0				130
Intangible amortization			145				0				0				145
Other			176				1,620				16				1,814
Total noninterest expense			1,142				6,346				44				7,532
Income before taxes			109				747				(16	)			840
Income tax			38				(39	)			(6	)			(7	)
Net Income		$	71			$	786			$	(10	)		$	847

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 Company’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 Company 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 Company conducts business, and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Overview

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

Results of Operations

Comparison of selected financial ratios and other results at or for the three-month period ending March 31, 2010 and 2009:

		At or for the three months ended
		March 31,
(In Thousands, except Per Share Data)		2010				2009
Total Assets		$	1,040,211			$	939,360
Net Income		$	847			$	1,684
Basic and Diluted Earnings Per Share		$	.06			$	.13
Return on Average Assets (Annualized)			.34	%			.76	%
Return on Average Equity (Annualized)			4.16	%			8.77	%
Efficiency Ratio (tax equivalent basis)			63.74	%			67.47	%
Equity to Asset Ratio			7.91	%			8.35	%
Tangible Common Equity Ratio *			7.25	%			7.57	%
Dividends to Net Income (Year-to-date)			47.82	%			94.30	%
Net Loans to Assets			57.77	%			60.00	%
Loans to Deposits			78.42	%			84.29	%

		March 31, 2010				March 31, 2009
Reconciliation of Common Stockholders’ Equity to Tangible Common Equity
Stockholders’ Equity		$	82,477			$	78,457
Less Goodwill and other intangibles			7,355				7,919
Tangible Common Equity		$	75,122			$	70,538

		March 31, 2010				March 31, 2009
Reconciliation of Total Assets to Tangible Assets
Total Assets		$	1,040,431			$	939,360
Less Goodwill and other intangibles			7,355				7,919
Tangible Assets		$	1,033,076			$	931,441

The quarter would have been one of the better performing quarters in the past few years if not for the increase in the provision for loan losses. The management team continues to actively monitor and address asset quality issues, and has increased the allowance for loan losses accordingly. The allowance increase was in an effort to be proactive towards the adequacy of the allowance to cover exposures in the loan portfolio. The Company’s challenges for the future quarters will continue to be managing issues related to the general economic conditions and to develop relationships to grow core business lines.

Net Interest Income. The following schedules detail the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

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

		Three Months Ended												Three Months Ended
		March 31, 2010												March 31, 2009
		AVERAGE												AVERAGE
		BALANCE				INTEREST				RATE (1)				BALANCE				INTEREST				RATE (1)
EARNING ASSETS
Loans (3) (5) (6)		$	600,026			$	9,326				6.30	%		$	554,456			$	9,162				6.70	%
Taxable securities (4)			241,488				2,241				3.76				206,044				2,296				4.52
Tax-exempt securities (4) (6)			58,798				885				6.10				59,003				878				6.03
Equity Securities (2) (6)			4,126				53				5.21				5,543				70				5.12
Federal funds sold			25,743				9				0.14				17,634				6				0.14
Total earning assets			930,181				12,514				5.46				842,680				12,412				5.97
NONEARNING ASSETS
Cash and due from banks			22,940												22,518
Premises and equipment			14,385												14,124
Allowance for Loan Losses			(7,071	)											(5,695	)
Unrealized gains (losses) on securities			6,511												4,485
Other assets (3)			42,162												24,551
Total Assets		$	1,009,108											$	902,663
INTEREST-BEARING LIABILITIES
Time deposits		$	320,307			$	2,168				2.75	%		$	289,129			$	2,469				3.46	%
Savings deposits			280,395				529				0.77				216,353				717				1.34
Demand deposits			104,951				48				0.19				98,611				103				0.42
Short term borrowings			123,125				285				0.94				99,792				505				2.05
Long term borrowings			26,647				282				4.29				53,267				517				3.94
Total Interest-Bearing Liabilities			855,425				3,312				1.57				757,152				4,311				2.31
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits			67,760												62,785
Other Liabilities			3,437												4,844
Stockholders’ equity			82,486												77,882
Total Liabilities and Stockholders’ Equity		$	1,009,108											$	902,663
Net interest income and interest rate spread						$	9,202				3.89	%						$	8,101				3.66	%
Net interest margin											4.01	%											3.90	%