Exhibit 13

CORPORATE PROFILE

Farmers National Banc Corp. (the “Corporation”) is a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Corporation has three subsidiaries, Farmers National Bank of Canfield (the “Bank”), an independent community bank with 16 offices; Farmers Trust Company, a non-depository trust bank; and Farmers National Insurance, LLC. The Corporation and its subsidiaries operate in one industry, domestic banking.

The Farmers National Bank of Canfield, chartered in 1887 as a national bank, is a full-service financial services company engaged in commercial and retail banking. The Bank’s main office is located at 20 South Broad Street, Canfield, Ohio. Business is conducted at a total of sixteen (16) retail offices and two (2) trust offices located in the counties of Mahoning, Columbiana and Trumbull. In addition, the Bank provides 24-hour access to a network of Automated Teller Machines and offers Internet and telephone banking services. As a national banking association, the Bank is a member of the Federal Reserve System, subject to supervision and regulation of the Comptroller of the Currency, and deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. The Bank is affected also by the monetary and fiscal policy of the United States and of various regulatory agencies.

The Bank competes with state and national banks located in Mahoning, Columbiana and Trumbull counties. The Bank also competes with a large number of other financial institutions, such as thrifts, insurance companies, consumer finance companies, credit unions and commercial finance leasing companies for deposits, loans and other financial service business. The principal methods of competition are the rates of interest charged for loans, the rates paid for funds, the fees charged for services and the availability of services.

CORE VALUES / BELIEFS

Integrity Respect
Diligence
Stewardship
Commitment
Relationships

MISSION STATEMENT

“Our organization will strive to be the premier financial partner providing the best products and services to achieve innovative solutions for customers, associates, shareholders and the community. We will do so with integrity, respect and commitment to quality.”

TABLE OF CONTENTS

Financial Highlights			3
Letters To Our Shareholders			4-9
Investor Information			10
Selected Financial Data			11-13
Management’s Discussion & Analysis			13-22
Management’s Report			23
Report Of Independent Auditors			24
Consolidated Financial Statements & Notes			25-44
Philanthropy			45
Farmers National Financial Group			46
Board Of Directors & Executive Team			47

FINANCIAL HIGHLIGHTS
(Dollar Amounts in Thousands Except for Per Share Data)

For the Year		2009				2008				2007
Net Income		$	5,842			$	5,665			$	5,925
Return on Average Assets			0.60	%			0.67	%			0.74	%
Return on Average Equity			7.32	%			7.67	%			7.95	%
Per Share
Net Income (Basic)		$	0.44			$	0.43			$	0.46
Net Income (Diluted)			0.44				0.43				0.46
Book Value			5.96				5.83				5.67
Balances at Year-End
Total Assets		$	1,014,808			$	880,370			$	798,236
Earning Assets			948,187				829,173				745,482
Total Deposits			777,552				648,010				593,428
Net Loans			601,995				546,452				508,647
Total Stockholders’ Equity			80,628				77,102				73,920
Cash Dividends			4,801				6,802				8,309
Common Shares Outstanding			13,520				13,230				13,028

To Our Shareholders:

On behalf of your Board of Directors, it is our distinct pleasure to present our Annual Report to Shareholders for 2009. The theme of this year’s Annual Report, “Standing Strong”, speaks to your Corporation’s continuing position of strength and stability in the midst of, and at times, an unpredictable national economic financial environment.

Your Corporation has responded to the needs and demands of this economic climate with what can accurately be described as “accelerated productivity.” Indeed, it would be difficult to point to any prior year in Farmers’ 122 year history in which we have successfully pursued and implemented so many goals and objectives.

To say that these last two years have been eventful would be beyond an understatement. This period was dominated by the worst financial crisis since the Great Depression. The financial services industry was directly impacted by reports that the mounting credit and liquidity crisis had overwhelmed what were once some of the worlds’ most powerful financial institutions. During those times, our industry saw major corporate consolidations, bank failures, government investment into corporations and heightened regulatory scrutiny to deal with the worsening in the credit markets. Financial institutions under stress were forced to make some very difficult decisions.

From left to right:
John S. Gulas, Executive Vice President & COO, Frank L. Paden, President & CEO and Carl D. Culp, Executive Vice President & CFO

Our Corporation is certainly not immune to these issues in the current economic environment; however, we are able to share with you in this Annual Report results that demonstrate growth in many categories of our business in 2009. Additionally, we made strategic decisions and advancements in processes and systems that will position us ahead of most of our peers and alongside many of the most progressive larger financial institutions.

We would not attempt to list all the achievements our Company accomplished during 2009. Some of those are highlighted below and you will find additional reports on Farmers National Investments and our wholly owned subsidiaries, Farmers Trust Company and Farmers National Insurance, LLC.

Reflecting balance sheet growth in 2009 in loans and deposits, your Corporation exceeded the $1 Billion mark in total assets for the first time in its history. In the banking industry, $1 Billion in total assets is often seen as a symbolic benchmark separating smaller community banks from community banks with a more significant role in the competitive marketplace.

CREDIT

Our loan portfolio increased 10% during 2009, reflecting substantial development in our traditionally strong automobile financing programs, which grew by approximately 24%.This is a time when local dealers and customers needed support and financing. Additionally, our commercial real estate loan portfolio grew 11% and our commercial and industrial (C&I) loan portfolio increased approximately 8%, year over year.

As a group, our commercial loan officers exceeded their aggressive target goals for 2009. As always, our desire to grow our business was measured against our long-instilled culture of fiscal conservatism and prudent risk management. We strive for that balance, which in our view, creates long-term shareholder value. When others exited the credit markets in our regional business marketplace, it is fair to say that our Company was perceived as the “Bank of Choice” for credit-worthy companies with a sound business model who were seeking capital this past year to grow and expand their business.

In 2009, we continued to emphasize our objective to make loans to creditworthy borrowers, conduct sound analysis of financial and collateral information, work constructively with borrowers experiencing difficulties and confront credit problems in a forthright and timely manner. We increased staff, devoted resources and re-engineered our credit administration processes to respond to signals that were identified in our loan portfolio.

The Bank experienced an increase in the asset quality ratio that measures nonperforming loans as a percentage of total loans during 2009. Our ratios remain better than peer groups at the local, state and regional level. However, levels of foreclosures and bankruptcy filings continue to rise and our markets continue to be impacted by high unemployment, depressed real estate values and high vacancy rates on commercial real estate. Net loan losses increased during 2009 and management took the necessary steps to provide reserves for these losses and for ongoing stress on the loan portfolio.

CAPITAL

The financial crisis highlighted the critical role that capital serves as the protection against loss, liquidity risk and insolvency. Financial institutions operate under a risk-based capital structure that risk-rates each of the assets on the bank’s balance sheet. Capital levels are then determined based on the risk analysis conducted by management and regulatory agencies. Financial institutions are being called on to conduct more robust capital analysis and planning to deal with growth initiatives, negative trends in asset quality and impairments in the investment portfolios; all of which could weaken capital levels. As part of the solution to improve capital levels, we are in an era where many institutions have curtailed or eliminated cash dividends to shareholders. Another factor that impacts capital is growth. As our Company continues to grow assets, more capital is required to support that growth.

Our Board of Directors and Management are in the midst of a comprehensive capital planning process that will give us the direction that we need to take to enable us to grow, practice prudent risk management, provide the capital levels to insure the Bank’s safety and soundness initiatives and enhance the long-term return to shareholders.

Community bank stock valuations did not demonstrate the recovery hoped for in 2009, and while this holds true for your Corporation as well, our current yield on cash dividends remains better than that of our peers.

For a more detailed explanation of your Company’s financial performance during 2009, please see the report prepared by Mr. Carl D. Culp, our Executive Vice President and Chief Financial Officer included in this Annual Report.

CORE SYSTEMS UPGRADES

As pleased as we are to point to our business development growth in 2009, we take equal pride in the successful deployment of several internal initiatives that show great promise for advancing your Company’s competitive position and for creating shareholder value. Specifically, we succeeded in implementing seven key system conversions over the course of five intensive months in 2009. These conversions are tantamount to re-engineering of the technology and processing core of our Bank, and included the following:

• Fiserv Core System — this included a total conversion of an in-house operating system to a more robust outsourcing solution for core banking systems.

• ATM processing — this conversion consisted of our decision to process all ATM, debit, credit and point of sale transactions directly through our core processing vendor.

• Mark IV — this new product gives our credit department a more efficient method to process consumer loan applications and automate all the processing accordingly.

• Compliance One — this product upgraded our lending documentation processes to a more efficient and consistent methodology.

• Funds Express Internet Banking — this technology upgrade provided us with a new vendor for a suite of on-line banking products along with a comprehensive cash management system for the corporate banking customers.

• Telephone Banking — as part of the new on-line banking vendor, we converted our previous telephone banking product to a more secure system for our customers.

• Bill Pay — this product was enhanced and added as a “free” service to be included in conjunction with our on-line banking product.

To our valued shareholder, we can say with assurance this represents a major technology investment and process leap forward for your Company. We now have the tools and procedures to offer our clients products and services commensurate with their needs in today’s quickly changing consumer and business environment. We can also report advancements in other key areas of our evolving business model.

RETAIL BANKING GROWTH

A key strategic priority for 2009 was to significantly increase our market share in our geographic footprint. Our retail banking division reported strong production results for 2009. Our branch network reported increases of 17% in core deposits, far exceeding our targets for success. This team of personal bankers was also successful by increasing branch loan production and commercial loan referrals by approximately 30% over the previous year.

Deposit growth increased alongside the growth in our overall loan portfolio. Total deposits increased by 20%, with exceptional growth in our Money Market Index product, which increased approximately 48% during the year. Our talented team of personal bankers executed the Bank’s strategic initiatives to generate new deposit relationships and increase market share during 2009. Management provided the foresight to refine and enhance the deposit products to meet the demands of our new and existing core deposit account holders.

During this year, we undertook a total remodeling of our Cornersburg branch demonstrating our commitment to that community to provide the best of facilities and services in a market that we have serviced for nearly 40 years. In addition, we continue to position ourselves for future growth opportunities in the marketplace.

FARMERS NATIONAL FINANCIAL GROUP

One of the emerging trends is to focus on fee-based businesses and service lines. The core of the 2010 focus will be on our Insurance Agency, Investments and Trust Company. With that said, we created Farmers National Insurance LLC, a separate entity under the holding company that operates within our Retail Banking Division. This full service insurance agency, which is managed by Mr. David Frank, is fully functional and we are just in the final stages of introducing and marketing this product and service to all customers. In February 2010, we contracted with Insuritas, the nation’s leading provider of outsourced insurance agencies to provide our Company with a turnkey, outsource insurance agency solution that takes full advantage of technology. This strategic commitment provides our customer with a full-service insurance agency where we own and operate the agency under our new insurance division, Farmers National Insurance. This outsourced insurance agency solution will be fully operational in the second quarter of 2010.

Our wealth management division of Farmers National Investments expanded during 2009 with the addition of a fourth investment representative to our branch network. Mr. Dan Cvercko was promoted to Investment Manager and he led his team of investment representatives to a record level of production during the past year. This business line contributed nearly $500,000 in net revenue to the Corporation.

The final piece of Farmers National Financial Group is the 2009 acquisition of the Farmers Trust Company. With over $832 Million in assets under management, Farmers Trust is the largest independently owned trust company in the State of Ohio. Mr. James H. Sisek, Esq., President & CEO manages this Trust Company that has offices located in Youngstown and Howland. Mr. Sisek provides a full report on the Trust Company and their achievements and contributions to the Corporation and the community in this Annual Report on the pages that follow.

Charles Darwin, the English Naturalist & Author once wrote, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” Over the past year, much has been asked of the dedicated Directors, Officers and Employees of the Corporation. They have more than risen to that challenge and responded to the changes.

In closing, we want to thank you for your continued support — for “Standing Strong” with this Company and its bright and developing future. There are always going to be challenges to face and new opportunities to seize. At 122 years old and counting, our team is proud of what we have accomplished and poised to look forward to continue to fill our role in the community and to create value for our shareholders for generations to come.

Sincerely,

Frank L. Paden
President & CEO

John S. Gulas
Executive Vice President & COO

FROM THE DESK OF:
CARL D. CULP, EXECUTIVE VICE PRESIDENT & CFO

To Our Shareholders:

The following paragraphs provide a brief overview of relevant information regarding your Company’s financial performance in 2009.

Net income for 2009 was $5.8 million, or $0.44 basic and diluted earnings per share compared to $5.7 million, or $0.43 diluted earnings per share in 2008, increases of 3.12% and 2.33% respectively. The results for 2008 included a pre-tax charge of $2.711 million representing a reclassification and recognition of an other-than-temporary impairment of securities, compared to $74 thousand in impairment charges in 2009.

The net interest margin improved from 3.58% for the year ended December 31, 2008 to 3.88% for 2009, or 30 basis points. Total average earning assets increased 14.19% while the yields on those average-earning assets decreased 39 basis points from 6.11% in 2008 to 5.72% in 2009. Total interest bearing liabilities increased 17.37%, and the cost on the average interest-bearing liabilities decreased from 2.85% in 2008 to 2.01% in 2009 or 84 basis points. The decrease in cost was the result of depositors investing in short-term time deposits and money market instruments, the continued repricing of maturing time deposits in the continued low interest rate environment, combined with an increase in repurchase agreements held by wholesale customers. The increase in net interest margin combined with a higher level of earning assets resulted in a significant improvement in net interest income from the previous year.

Noninterest income, excluding the impairment charges mentioned above, increased by $4.134 million in 2009, primarily resulting from an addition of $3.469 million in trust income. Earlier in the year, the Company successfully completed the acquisition of Butler Wick Trust Company, which has since been renamed Farmers Trust Company. The Trust Company acquisition complements our core retail banking and asset management services.

DEPOSITS

Total deposits increased 20% during the past year, as our Company developed relationships with new customers along with a continued movement of funds to deposits from equity markets as customers seek liquidity and security. The Company prices deposit rates to remain competitive within the market to retain customers. The effect of lower short-term interest rates during the year and a shift to short term deposit products and repurchase agreements by customers resulted in total interest expense decreasing $3.4 million in 2009.

Strategies for 2010 include a continued focus on growth in our level on noninterest bearing deposits; offer time deposit products in specific time periods to balance our exposure to potentially rising interest rates; and remain focused on lowering our overall cost of funds.

LOANS

Net loans increased 10.16% during 2009. The Company continues to build on a strategy developed a few years ago to diversify the loan portfolio and employ a more balanced portfolio management model between commercial, commercial real estate, residential real estate and consumer loans. At year-end, we have approximately 13% of the loan portfolio in commercial loans, 35% in commercial real estate loans, 30% in residential real estate loans and 22% in consumer loans. Each of the loan categories experienced solid growth during 2009, but we especially realized significant increases in our commercial real estate and consumer non-real estate loan portfolios. Our team of experienced loan officers remain focused on increasing our portfolio by building long-term customer relationships.

Our management team has taken a proactive stance to address asset quality deterioration, most notably in the commercial real estate portfolio. During the year, management provided $6.05 million to the allowance for loan losses. Two key ratios to monitor asset quality performance are the net charge-offs/average loans and the allowance for loan losses/non-performing loans. At year-end 2009, these ratios were .71% and 73% respectively compared to .26% and 104% in 2008. As a result of these changes, we increased the allowance for loan losses in 2009. Management remains diligent in monitoring local economic conditions and the impact that it may have on our loan portfolio.

Loan strategies for the upcoming year are to grow balances in our loan portfolios responsibly while maintaining our underwriting standards and carefully pricing new loans in a potentially rising interest rate environment.

STOCKHOLDERS EQUITY

Shareholder’s Equity increased $3.5 million or 4.6% during 2009. At the end of the year, the Bank is “well capitalized” under regulatory guidelines. In order to preserve capital and create a stronger position for long-term shareholder value, we decreased our quarterly cash dividend to $0.06 per share during the third quarter Total cash dividends declared were $4.8 million in 2009 and $6.8 million in 2008.

Equity strategies for 2010 include: increase earnings and preserve capital; and evaluate opportunities to raise new capital through various alternatives to support growth initiatives.

Even during these difficult economic times, our Company was able to report another year of strong earnings, with a 3% increase over 2008 results. Every Board member, Officer and Employee plays an important part in achieving these financial results. We will continue to remain focused on our core values as we strive to build shareholder value.

Sincerely,

Carl D. Culp,
Executive Vice President & CFO

FROM THE DESK OF:
JAMES H. SISEK, ESQ. PRESIDENT & CEO
AND WILLIAM HANSHAW, ESQ. EXECUTIVE V.P. & SECRETARY

James H. Sisek, Esq. President & CEO		William Hanshaw, Esq. Executive V.P. & Secretary

To Our Shareholders:

2009 has been both an exciting and challenging year for the Trust Company. We have weathered a tumultuous financial market and yet still remain strong. Despite the market fluctuations, our assets have grown this year from approximately $622 million to approximately $822 million. Although our name has changed, our staff, location and commitment to the Valley remain unchanged. We are confident that Farmers Trust Company adds greatly to the value of your investment in Farmers National Banc Corp. It is our pleasure to share some information regarding Farmers Trust Company.

COMPANY PROFILE

Farmers Trust Company, formerly known as Butler Wick Trust Company, was originally incorporated in Sharon, Pennsylvania in December 1995, with the Youngstown, Ohio office as its “operation center.” In 1998, as a result of changes in Ohio law, Butler Wick Trust Company was re-incorporated in Ohio as a state chartered bank authorized by the Ohio Division of Financial Institutions to conduct trust business, and the current downtown Youngstown site became headquarters. In 2000, the Trust Company decided to expand its presence in the Trumbull County market by opening a Howland office staffed with five employees and headed by Attorney William Hanshaw. On April 1, 2009, Farmers National Banc Corp. completed its acquisition of Butler Wick Trust Company from United Community Financial Corporation. In May 2009, Butler Wick Trust Company officially changed its name to Farmers Trust Company, a subsidiary of Farmers National Banc Corp. holding company, while maintaining the same staff and locations.

Farmers Trust Company, the only locally owned trust company in the Mahoning Valley, began with just seven employees growing to a current staff of 30 with two locations. Attorney James H. Sisek, President of Farmers Trust Company, operates the Trust Company’s Youngstown office at 100 Federal Plaza East, Youngstown, Ohio, 44503, and Attorney William Hanshaw, Executive Vice President supervises the Howland location at 1695 Niles-Cortland Rd., NE, Suite 2, Warren, Ohio 44484. Farmers Trust Company maintains its own Administrative, Investment, Operations, Tax, Employee Benefits and Business Development Departments. We proudly provide quality service through a professional team of employees on a local level; both a strength and a uniqueness of our firm.

Farmers Trust Company is regulated and examined by the State of Ohio, Division of Financial Institutions. Our external auditors are Crowe Horwath, LLP and our internal auditors are Packer Thomas & Co., CPA.

INVESTMENT MANAGEMENT

Farmers Trust Company is skilled in administering all types of trusts and provides professional and thorough administration of estates, personal trusts, charitable trusts and employee benefit plans.

The Investment Department has assisted several not-for-profit organizations with the development of their own respective investment policies and manages investments in accordance with The Ohio Prudent Investors Act and the objective of each client. The following graph illustrates the growth of the Trust Company:

CHARITABLE TRUSTS

The Trust Company manages in excess of $100 million for many qualified charities, individuals and foundations throughout the greater community. In 2009, over $6 million was distributed to organizations either at the direction of the donor or under the terms of the trust agreement for charitable trusts, and as gifts from individual trusts. The beneficiaries of these charitable and personal trusts are vast and varied. Area colleges and universities received in excess of $1,064,000 with approximately $620,000 distributed to Youngstown State University for various scholarship programs including early instruction programs such as Academic Achievers. Over $875,000 was donated in support of cultural programs such as Mahoning Valley Historical Society, Friends of Fellows Riverside Garden, Henry H. Stambaugh Auditorium Association, The Youngstown Playhouse and The Youngstown Symphony, as well as local parks and historical societies. Over $646,000 was distributed for humanitarian services to organizations such as Habitat for Humanity, American Red Cross, Easter Seals, Hospice, The Rescue Mission and others. St. Elizabeth Medical Center, Akron Children’s Hospital and Trumbull Memorial Hospital along with other health providers received over $759,000. The American Cancer Society, American Diabetes Association and Multiple Sclerosis Society were the recipients of more than $90,000 to benefit medical research. Local churches and temples received donations of over $466,000.

Other beneficiaries such as the YWCA, YMCA, United Way, Special Olympics, Girl Scouts, Boy Scouts and many more throughout our community received assistance through donations totaling more than $785,000.

Clients of Farmers Trust Company are among the most generous in the Valley as evidenced by the chart below:

EMPLOYEE BENEFIT DIVISION

The Trust Company’s Employee Benefit Division is a highly specialized department of $160 million in managed assets within the Trust Company servicing the overall retirement needs of clients. We provide full personalized administrative and record keeping services for all types of retirement plans, including various defined contribution plans, such as profit sharing, 401(k)’s and money purchase pension plans, defined benefit pension and 403(b) plans as well as the administration and investment management of larger IRA rollover accounts. Certified Specialists ensure all client retirement plans follow the rigorous government imposed regulations to fulfill strict compliance and audit issues, whether in a daily valuation and/or cash balance forward environment. The Trust Company can serve in the capacity of Plan Trustee, Investment Manager and/or Custodian, thus relieving clients of any or all fiduciary liability issues with regards to the plan administration or management of their plan’s assets. Other services provided include: sponsored IRS approved prototype plan documents, consulting and plan design services to clients, conducting participant enrollment and 404(c) educational meetings, all tax reporting for both plan and participants, 24/7 web site access and toll free numbers.

CONCLUSION

Our locally owned, operated, staffed and controlled Trust Company offers outstanding professional estate planning, trust, investment and retirement services. Your family deserves a professional trustee who knows you as an individual rather than an account number. Consider a conversation with one of our trust officers at your convenience.

Sincerely,

James H. Sisek, Esq.
President & CEO

William Hanshaw, Esq.
Executive V.P. & Secretary

INVESTOR INFORMATION

Corporate Headquarters: Farmers National Banc Corp., 20 South Broad Street, P.O. Box 555, Canfield, OH 44406. Phone 330-533-3341 or Toll Free 1-888-988-3276.

Web site: www.fnbcanfield.com

Dividend Payments: Subject to the approval of the Board of Directors, quarterly cash dividends are customarily payable on or about the 30th day of March, June, September and December.

Dividend Reinvestment Plan (DRIP): Registered shareholders can purchase additional shares of Farmers’ common stock through Farmers Dividend Reinvestment Plan. Participation is voluntary and allows for automatic reinvestment of cash dividends and the safekeeping of stock certificates. To obtain our Plan prospectus, contact Susan Better at the Bank or e-mail exec@fnbcanfield.com.

Direct Deposit of Cash Dividends: The direct deposit program, which is offered at no charge, provides for automatic deposit of quarterly dividends directly to a checking or savings account. For information regarding this program, please contact the Bank.

Stock Transfer Agent: The Farmers National Bank of Canfield, Attention: Susan Better, AVP, Corporate Services Administration P.O. Box 555 Canfield, OH 44406

Form 10-K: A copy of the Annual Report filed with the Securities and Exchange Commission will be provided to any shareholder on request to the Corporation, to the attention: Mr. Carl D. Culp, Treasurer, Farmers National Banc Corp., 20 South Broad Street, P.O. Box 555 Canfield, OH 44406

Common Stock Listing and Information as to Stock Prices and Dividends: The common stock of the Corporation trades on the OTC Bulletin Board under the symbol FMNB.OB. There are approximately 13 local and/or regional brokerage firms that are known to be relatively active in trading the Corporation’s common stock. Set forth in the accompanying table are per share prices at which common stock of the Corporation has actually been purchased and sold in transactions during the periods indicated, to the knowledge of the Corporation. Also included in the table are dividends per share paid on the outstanding common stock and any stock dividends paid. As of December 31, 2009, there were 13,519,605 shares outstanding and 3,760 shareholders of record of common stock.

MARKET AND DIVIDEND SUMMARY

Dividend Date		High				Low				Dividend
March 2008		$	9.15			$	6.84			$	0.16
June 2008		$	8.45			$	7.00			$	0.12
September 2008		$	7.55			$	5.15			$	0.12
December 2008		$	7.35			$	3.55			$	0.12
March 2009		$	6.74			$	3.65			$	0.12
June 2009		$	6.80			$	4.70			$	0.12
September 2009		$	6.20			$	4.70			$	0.06
December 2009		$	5.40			$	4.00			$	0.06

The following graph compares the cumulative 5-year total return to shareholders on Farmers National Banc Corp.’s common stock relative to the cumulative total returns of the NASDAQ Composite index and the NASDAQ Bank index. The graph assumes that the value of the investment in the company’s common stock and in each of the indexes (including reinvestment of dividends) was $100 on 12/31/2004 and tracks it through 12/31/2009.

		12/04				12/05				12/06				12/07				12/08				12/09
Farmers National Banc Corp.			100.00				83.41				73.16				57.09				28.12				39.76
NASDAQ Composite			100.00				101.33				114.01				123.71				73.11				105.61
NASDAQ Bank			100.00				98.57				111.92				89.33				71.39				60.47

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

SELECTED FINANCIAL DATA
(Table Dollar Amounts In Thousands except Per Share Data)

For the Years Ending December 31,		2009				2008				2007				2006				2005
SUMMARY OF EARNINGS
Total Interest Income (including fees on loans)		$	49,775			$	46,415			$	45,538			$	44,098			$	42,481
Total Interest Expense			16,547				19,947				21,893				20,199				15,236
Net Interest Income			33,228				26,468				23,645				23,899				27,245
Provision for Loan Losses			6,050				1,420				570				200				649
Noninterest Income (1)			9,388				2,617				4,408				5,134				4,386
Noninterest Expense			29,655				21,013				20,382				19,619				20,212
Income Before Income Taxes			6,911				6,652				7,101				9,214				10,770
Income Taxes			1,069				987				1,176				1,999				2,710
NET INCOME		$	5,842			$	5,665			$	5,925			$	7,215			$	8,060
PER SHARE DATA
Basic earnings per share		$	0.44			$	0.43			$	0.46			$	0.55			$	0.62
Diluted earnings per share			0.44				0.43				0.46				0.55				0.62
Cash Dividends Paid			0.36				0.52				0.64				0.64				0.64
Book Value at Year-End			5.96				5.83				5.67				5.83				5.82
Tangible Book Value (2)			5.41				5.83				5.67				5.83				5.82
BALANCES AT YEAR-END
Total Assets		$	1,014,808			$	880,370			$	798,236			$	821,584			$	827,069
Earning Assets			948,187				829,173				745,482				778,719				776,300
Total Deposits			777,552				648,010				593,428				619,747				630,800
Short-Term Borrowings			125,912				105,435				74,174				77,792				76,963
Long-Term Borrowings			27,169				46,464				52,455				41,602				39,508
Net Loans			601,995				546,452				508,647				502,594				506,054
Total Stockholders’ Equity			80,628				77,102				73,920				76,223				75,864
AVERAGE BALANCES
Total Assets		$	970,163			$	841,630			$	804,968			$	818,549			$	828,180
Total Stockholders’ Equity			79,775				73,889				74,615				75,143				77,475
SIGNIFICANT RATIOS
Return on Average Assets (ROA)			0.60	%			0.67	%			0.74	%			0.88	%			0.97	%
Return on Average Equity (ROE)			7.32				7.67				7.95				9.60				10.40
Average Earning Assets/Average Assets			92.79				93.68				94.86				94.98				94.59
Average Equity/Average Assets			8.22				8.78				9.26				9.18				9.35
Loans/Deposits			78.37				85.18				86.63				82.00				81.15
Allowance for Loan Losses/Total Loans			1.21				1.01				1.06				1.10				1.14
Allowance for Loan Losses/Nonperforming Loans			73.25				104.05				231.22				324.85				290.57
Efficiency Ratio (On tax equivalent basis)			67.00				63.02				68.00				65.04				61.54
Net Interest Margin			3.88				3.58				3.33				3.29				3.67
Dividend Payout Rate			82.18				120.07				140.24				115.14				103.08
Tangible Common Equity Ratio (3)			7.26				8.76				9.26				9.28				9.17

AVERAGE BALANCE SHEETS AND RELATED YIELDS AND RATES
(Table Dollar Amounts In Thousands except Per Share Data)

		2009												2008												2007
		AVERAGE												AVERAGE												AVERAGE
Years Ended December 31,		BALANCE				INTEREST				RATE				BALANCE				INTEREST				RATE				BALANCE				INTEREST				RATE
EARNING ASSETS
Loans (1) (3) (5)		$	581,629			$	38,130				6.56	%		$	515,671			$	35,351				6.86	%		$	508,812			$	35,203				6.92	%
Taxable securities (2)			224,784				9,399				4.18				183,201				8,063				4.40				168,074				7,017				4.17
Tax-exempt securities (2) (5)			60,911				3,667				6.02				67,666				3,985				5.89				70,413				4,112				5.84
Equity securities (4) (5)			5,147				263				5.11				7,414				420				5.66				9,360				664				7.09
Federal funds sold			27,769				32				0.12				14,402				338				2.35				6,970				342				4.91
Total earning assets			900,240				51,491				5.72				788,354				48,157				6.11				763,629				47,338				6.20
NONEARNING ASSETS
Cash and due from banks			23,098												23,089												21,774
Premises and equipment			14,230												14,363												14,630
Allowance for Loan Losses			(6,377	)											(5,433	)											(5,597	)
Unrealized gains (losses) on securities			5,980												(1,089	)											(2,264	)
Other assets (1)			32,992												22,346												12,796
Total Assets		$	970,163											$	841,630											$	804,968
INTEREST-BEARING LIABILITIES
Time deposits		$	312,511			$	9,742				3.12	%		$	286,980			$	12,216				4.26	%		$	270,269			$	12,675				4.69	%
Savings deposits			238,618				2,670				1.12				186,022				2,964				1.59				166,840				3,334				2.00
Demand deposits			101,470				314				0.31				97,401				468				0.48				97,362				547				0.56
Short term borrowings			123,758				1,847				1.49				80,621				2,047				2.54				80,174				2,957				3.69
Long term borrowings			45,543				1,974				4.33				49,261				2,252				4.57				50,536				2,380				4.70
Total Interest-Bearing Liabilities			821,900				16,547				2.01				700,285				19,947				2.85				665,181				21,893				3.29
NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits			64,563												62,350												60,632
Other Liabilities			3,925												5,106												4,540
Stockholders’ equity			79,775												73,889												74,615
Total Liabilities and Stockholders’ Equity		$	970,163											$	841,630											$	804,968
Net interest income and interest rate spread						$	34,944				3.71	%						$	28,210				3.26	%						$	25,445				2.91	%
Net interest margin											3.88	%											3.58	%											3.33	%

RATE AND VOLUME ANALYSIS
(Table Dollar Amounts In Thousands except Per Share Data)

The following table analyzes by rate and volume the dollar amount of changes in the components of the interest differential:

		2009 change from 2008												2008 change from 2007
		Net				Change Due				Change Due				Net				Change Due				Change Due
		Change				To Volume				To Rate				Change				To Volume				To Rate
TAX EQUIVALENT INTEREST INCOME
Loans		$	2,779			$	4,522			$	(1,743	)		$	148			$	475			$	(327	)
Taxable securities			1,336				1,830				(494	)			1,046				632				414
Tax-exempt securities			(318	)			(398	)			80				(127	)			(160	)			33
Equity securities			(157	)			(128	)			(29	)			(244	)			(138	)			(106	)
Federal funds sold			(306	)			314				(620	)			(4	)			365				(369	)
Total interest income		$	3,334			$	6,140			$	(2,806	)		$	819			$	1,174			$	(355	)
INTEREST EXPENSE
Time deposits		$	(2,474	)		$	1,087			$	(3,561	)		$	(459	)		$	784			$	(1,243	)
Savings deposits			(294	)			838				(1,132	)			(370	)			383				(753	)
Demand deposits			(154	)			20				(174	)			(79	)			0				(79	)
Short term borrowings			(200	)			1,095				(1,295	)			(910	)			16				(926	)
Long term borrowings			(278	)			(170	)			(108	)			(128	)			(60	)			(68	)
Total interest expense		$	(3,400	)		$	2,870			$	(6,270	)		$	(1,946	)		$	1,123			$	(3,069	)
Increase (decrease) in tax equivalent net interest income		$	6,734			$	3,270			$	3,464			$	2,765			$	51			$	2,714

The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis represents a review of the Company’s consolidated financial condition and results of operations. This review should be read in conjunction with the consolidated financial statements and footnotes.

Forward Looking Statements

When used in this annual report, 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.

Results of Operations:

Comparison of Operating Results for the Years Ended December 31, 2009 and 2008.

The Company’s net income totaled $5.842 million during 2009, compared to $5.665 million for 2008. On a per share basis, diluted earnings per share were $.44 as compared to $.43 diluted earnings per share for 2008. Common comparative ratios for results of operations include the return on average assets and return on average stockholders’ equity. For 2009 the return on average equity was 7.32% compared to 7.67% for 2008. The return on average assets was .60% for 2009 and .67% for 2008.

The results for 2008 included $2.711 million in pre-tax charges recognized for other-than-temporary impairment of securities, related mainly to Fannie Mae Series F preferred stock held in the Company’s investment portfolio. The current year’s impairment charge related to equity securities amounted to $74 thousand pre-tax.

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

Net interest income, the principal source of the Company’s earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 2009, taxable equivalent net interest income increased $6.734 million or 23.87% from 2008. Interest-earning assets averaged $900.240 million during 2009 increasing $111.886 million or 14.19% compared to 2008. The Company’s interest-bearing liabilities increased 17.37% from $700.285 million in 2008 to $821.900 million in 2009.

The Company finances its earning assets with a combination of interest-bearing and interest-free funds. The interest-bearing funds are composed of deposits, short-term borrowings and long-term debt. Interest paid for the use of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits and stockholders’ equity, require no interest expense and, therefore, contribute significantly to net interest income.

The profit margin, or spread, on invested funds is a key performance measure. The Company monitors two key performance indicators — net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest spread in 2009 was 3.71% increasing from 3.26% in 2008. The net interest margin represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 2009 the net interest margin, measured on a fully taxable equivalent basis increased to 3.88%, compared to 3.58% in 2008.

Total taxable equivalent interest income was $51.491 million for 2009, which is $3.334 million more than the $48.157 million reported in 2008. This increase is primarily the result of growth in the level of average earning assets, increasing 14.19% during 2009. Average loans increased $65.958 million or 12.79% in 2009, but the yields decreased from 6.86% in 2008 to 6.56% in 2009. Income from securities and federal funds increased $555 thousand or 4.33% in 2009, but the Company saw its yields on these assets decrease from 4.70% in 2008 to 4.19% in 2009. The average balance of investment securities and federal funds sold increased 16.84% in 2009, mainly due to increases in customer deposits.

Total interest expense amounted to $16.547 million for 2009, an 17.05% decrease from $19.947 million reported in 2008. The decrease in 2009 is the result of lower rates of interest paid on interest-bearing deposits and repurchase agreements. The cost of interest-bearing liabilities decreased from 2.85% in 2008 to 2.01% in 2009.

Management will continue to evaluate future changes in interest rates and the shape of the treasury yield curve so that assets and liabilities may be priced accordingly to minimize the impact on the net interest margin.

Other Income

Total other income, excluding pre-tax impairment charges discussed on page 13, increased by $4.134 million in 2009. Most of this increase is due to an addition of $3.469 million of trust income. During 2009, the Company completed an acquisition of Butler Wick Trust Company, now known as Farmers Trust Company. The acquisition of the Trust Company gives the Company the ability to provide investment, trust and estate services to private individuals and small corporate clients with a high level of attention and confidentiality. This addition to the Company significantly complements core retail banking and asset management.

Other income was also impacted by gains on the sales of securities. Security gains were $1.017 million in 2009 compared to $474 thousand in 2008.

Other Expenses

Total other expenses for 2009 increased 41.13% or $8.642 million from 2008, and was mainly the result of an increase of $3.52 million in salaries and employee benefits, $1.36 million in FDIC insurance premiums, $453 thousand in merger costs and $449 thousand in amortization associated with the Trust Company acquisition. Most of the $3.52 million increase in salaries and employee benefits can be attributed to increases of $2.56 million in salaries and $561 thousand in employee health insurance expense.

Below is a detail of non-interest expense line items classified between the total Company, the Company without Trust, and the Trust Company for the year ending December 31, 2009. The Company purchased the Trust Company on March 31, 2009, subsequently only nine months of Trust non-interest expense is detailed in the following table:

		For the Year Ended December 31, 2009
		Total				Company
Noninterest expense		Company				without Trust				Trust
Salaries and employee benefits		$	15,145			$	13,073			$	2,072
Occupancy and equipment			3,538				3,195				343
State and local taxes			930				883				47
Professional fees			1,020				984				36
Advertising			595				571				24
FDIC insurance			1,543				1,543				0
Merger related costs			453				453				0
Intangible amortization			449				0				449
Other operating expenses			5,982				5,553				429
Total noninterest expense		$	29,655			$	26,255			$	3,400

The Company’s tax equivalent efficiency ratio increased from 63.02% in 2008 to 67.00% in 2009. The efficiency ratio was adversely impacted by the merger expenses and FDIC insurance expenses disclosed in the table above. The efficiency ratio is calculated as follows: non-interest expense divided by the sum of tax equivalent net interest income plus non-interest income, excluding security gains and losses and intangible amortization. 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.

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

Income Taxes

Income tax expense totaled $1.069 million for 2009 and $987 thousand for 2008. Income taxes are computed using the appropriate effective tax rates for each period. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective income tax rate was 15% for the periods ending 2009 and 2008. Refer to Note N to the consolidated financial statements for additional information regarding the effective tax rate.

Comparison of Operating Results for the Years Ended December 31, 2008 and 2007.

The Company’s net income totaled $5.7 million during 2008 compared to $5.9 million for 2007. On a per share basis, diluted earnings per share was $.43 for 2008 as compared to $.46 for 2007. For 2008, the return on average equity was 7.67% as compared to 7.95% for 2007. The return on average assets was .67% for 2008 and .74% for 2007. For 2008, taxable equivalent net interest income increased $2.765 million or 10.87% more than 2007. Interest-earning assets averaged $788.354 million during 2008 increasing $24.725 million or 3.24% compared to 2007. For 2008 the net interest margin, measured on a fully taxable equivalent basis was 3.58% in comparison to 3.33% for 2007. The results for 2008 included a pre-tax charge of $2.711 million recognized for other-than-temporary impairment of securities, compared to $873 thousand of impairment charges recognized in 2007.

Total taxable equivalent interest income was $48.157 million for 2008 which was $819 thousand more than the $47.338 million reported in 2007. This moderate increase was primarily the result of an increase in the level of average earning assets, increasing 3.24% from $763.629 million in 2007 to $788.354 million in 2008. Average loan balances increased $6.859 million or 1.35% but the yields decreased from 6.92% in 2007 to 6.86% in 2008. Income from securities and federal funds sold increased $671 thousand or 5.53% in 2008, but the Company saw its yields on these assets decrease from 4.76% in 2007 to 4.70% in 2008. The average balances of investment securities and federal funds sold increased 7.01% in 2008, mainly due to increases in customer deposits.

Total interest expense amounted to $19.947 million for 2008, an 8.89% decrease from $21.893 million reported in 2007. The decrease in 2008 is the result of lower rates of interest paid on a lower level of interest-bearing deposits and repurchase agreements. The cost of interest-bearing liabilities decreased from 3.29% in 2007 to 2.85% in 2008.

Other Income

Total other income in 2008, excluding an $2.711 million pre-tax impairment charge, increased by $47 thousand. This increase is primarily due to a $466 thousand increase in bank-owned life insurance income offset by a decrease in security gains. Security gains were $474 thousand in 2008 compared to $771 thousand in 2007.

Other Expenses

Total other expenses for 2008 increased 3.10% or $631 thousand from 2007. Most of this increase resulted from higher occupancy and equipment expense, as well as other operating expenses, which increased 6.98% and 10.26% respectively. Salaries and employee benefits decreased $106 thousand, mainly as a result of fewer full time equivalent employees. The Company’s tax-equivalent efficiency ratio improved from 68.00% in 2007 to 63.02% in 2008. The efficiency ratio was favorably impacted by the $2.765 million increase in tax equivalent net interest income, while keeping noninterest expenses to a modest increase of $631 thousand.

Income Taxes

Income tax expense totaled $987 thousand for 2008 and $1.176 million for 2007. The effective income tax rate was 15% and 17% for the periods ending 2008 and 2007, respectively.

Market Risk

Important considerations in asset/liability management are liquidity, the balance between interest rate sensitive assets and liabilities and the adequacy of capital. Interest rate sensitive assets and liabilities are those which have yields on rates subject to change within a future time period due to maturity of the instrument or changes in market rates. While liquidity management involves meeting the funds flow requirements of the Company, the management of interest rate sensitivity focuses on the structure of these assets and liabilities with respect to maturity and repricing characteristics. Balancing interest rate sensitive assets and liabilities provides a means of tempering fluctuating interest rates and maintaining net interest margins through periods of changing interest rates. The Company monitors interest rate sensitive assets and liabilities to determine the overall interest rate position over various time frames.

The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income and the net present value of equity in the event of a sudden and sustained 200 basis point increase or decrease in market interest rates:

Changes In Interest Rate		2009				2008				ALCO
(basis points)		Result				Result				Guidelines
Net Interest Income Change
+200			-6.41	%			-5.66	%			15.00	%
-200			-2.09	%			2.11	%			15.00	%
Net Present Value Of Equity Change
+200			-6.32	%			-7.41	%			20.00	%
-200			-31.98	%			-7.35	%			20.00	%

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

It should be noted that the change in the net present value of equity exceeded policy when the simulation model assumed a sudden decrease in rates of 200 basis points (2%). This primarily because the positive impact on the fair value of assets would not be as great as the negative impact on the fair value of certain liabilities. Specifically, because core deposits typically bear relatively low interest rates, their fair value would be negatively impacted as the rates could not be adjusted by the full extent of the sudden decrease in rates. Management does not believe that a 200 basis rate decline is realistic in the current interest rate environment. The remaining results of this analysis comply with internal limits established by the Company. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. The Company has no market risk sensitive instruments held for trading purposes, nor does it hold derivative financial instruments, and does not plan to purchase these instruments in the near future.

With the largest amount of interest sensitive assets and liabilities maturing within twelve months, the Company monitors this area most closely. Early withdrawal of deposits, prepayments of loans and loan delinquencies are some of the factors that can impact actual results in comparison to our simulation analysis. In addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change in net margin.

Interest rate sensitivity management provides some degree of protection against net interest income volatility. It is not possible or necessarily desirable to attempt to eliminate this risk completely by matching interest sensitive assets and liabilities. Other factors, such as market demand, interest rate outlook, regulatory restraint and strategic planning also have an effect on the desired balance sheet structure.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company’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 Company include assets considered relatively liquid such as short-term investment securities, federal funds sold and cash and due from banks.

Along with its liquid assets, the Company has additional sources of liquidity available which help to insure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at three major domestic banks. At December 31, 2009, the Company had not borrowed against these lines of credit. Management feels that its liquidity position is more than adequate and will continue to monitor the position on a monthly basis. The Company also has additional borrowing capacity with the Federal Home Loan Bank of Cincinnati (“FHLB”), as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. The Company views its membership in the FHLB as a solid source of liquidity. As of December 31, 2009, the Bank is eligible to borrow an additional $60.2 million from the FHLB under various fixed rate and variable rate credit facilities. Advances outstanding from the Federal Home Loan Bank at December 31, 2009 amounted to $26.9 million.

The primary investing activities of the Company are originating loans and purchasing securities. During 2009, net cash used in investing activities amounted to $105.66 million compared to $89.33 million used in 2008. Net increases in loans were $62.22 million in 2009 compared to $39.40 million in 2008. Purchases of securities available for sale were $126.52 million in 2009 compared to $141.65 million in 2008. Proceeds from maturities and sales of securities available for sale were $92.90 million in 2009 compared to $92.22 million in 2008.

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings. Net cash provided by financing activities amounted to $127.36 million for 2009 compared to $74.42 million in 2008. Most of this change is a result of the net increase in deposits. Deposits increased $129.54 million in 2009 compared to a $54.58 million in 2008. Short-term borrowings increased $20.47 million in 2009 compared to $31.26 million in 2008.

Financial Condition

Total Assets increased $134.44 million or 15.27% since December 31, 2008. Average earning assets also increased by $111.89 million since 2008. The increase in assets is mainly the result of increases in deposit balances. Total Liabilities increased $130.91 million or 16.30% since December 31, 2008. Average interest-bearing liabilities also increased $121.62 million from 2008 to 2009.

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

LOAN PORTFOLIO

Maturities and Sensitivities of Loans to Interest Rates

The following schedule shows the composition of loans and the percentage of loans in each category at the dates indicated:

Years Ended December 31,		2009								2008								2007								2006								2005
Commercial, Financial and Agricultural		$	75,893				12.5	%		$	70,410				12.7	%		$	45,844				8.9	%		$	40,698				8.0	%		$	38,722				7.6	%
Commercial Real Estate			215,917				35.4				195,244				35.4				193,187				37.6				181,128				35.6				164,936				32.2
Residential Real Estate			180,877				29.7				173,246				31.4				170,006				33.1				169,937				33.5				165,386				32.3
Consumer			136,708				22.4				113,105				20.5				105,069				20.4				116,425				22.9				142,870				27.9
Total Loans		$	609,395				100.0	%		$	552,005				100.0	%		$	514,106				100.0	%		$	508,188				100.0	%		$	511,914				100.0	%

The following schedule sets forth maturities based on remaining scheduled repayments of principal for commercial and commercial real estate loans listed above as of December 31, 2009:

Types of Loans		1 Year or less				1 to 5 Years				Over 5 Years
Commercial and Commercial Real Estate		$	38,872			$	36,304			$	216,634

The amounts of commercial and commercial real estate loans as of December 31, 2009, based on remaining scheduled repayments of principal, are shown in the following table:

Loan Sensitivities		1 Year or less				Over 1 Year				Total
Floating or Adjustable Rates of Interest		$	29,470			$	180,241			$	209,711
Fixed Rates of Interest			9,402				72,697				82,099
Total Loans		$	38,872			$	252,938			$	291,810

Total loans were $609.395 million at year-end 2009 compared to $552.005 million at year-end 2008. This represents an increase of 10.40%. Loans comprised 64.61% of the Bank’s average earning assets in 2009, compared to 65.41% in 2008. The product mix in the Loan Portfolio includes Commercial Loans comprising 12.5%, Residential Real Estate Loans 29.7%, Commercial Real Estate Loans 35.4% and Consumer Loans 22.4% at December 31, 2009 compared with 12.7%, 31.4%, 35.4% and 20.5%, respectively, at December 31, 2008.

Loans contributed 74.1% of total taxable equivalent interest income in 2009 and 73.4% in 2008. Loan yield was 6.56% in 2009, 84 basis points greater than the average rate for total earning assets. Management recognizes that while the Loan Portfolio holds some of the Bank’s highest yielding assets, it is inherently the most risky portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the approval process. To minimize risks associated with changes in the borrower’s future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

Consumer Loans increased from $113.105 million on December 31, 2008 to $136.708 million on December 31, 2009 representing a 20.87% increase. Management continues to target the automobile dealer network to purchase indirect Installment Loans. Dealer paper was purchased using strict underwriting guidelines with an emphasis on quality. Indirect Loans comprise 90.8% of the Consumer Loan Portfolio. Net loan losses in the Consumer Loan portfolio have increased to $833 thousand in 2009 as compared to $409 thousand in 2008.

Residential Real Estate Mortgage Loans increased 4.40% to $180.877 million at December 31, 2009, compared to $173.246 million in 2008. Commercial Real Estate Loans increased from $195.244 million in 2008 to $215.917 million in 2009. The Company originated both fixed rate and adjustable rate mortgages during 2009. Fixed rate terms are generally limited to fifteen year terms while adjustable rate products are offered with maturities up to thirty years.

Commercial Loans at December 31, 2009 increased 7.79% from year-end 2008 with outstanding balances of $75.893 million. The Bank’s commercial loans are granted to customers within the immediate trade area of the Bank. The mix is diverse, covering a wide range of borrowers, business types and local municipalities. The Bank monitors and controls concentrations within a particular industry or segment of the economy. These loans are made for purposes such as equipment purchases, capital and leasehold improvements, the purchase of inventory, general working capital and small business lines of credit.

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

SUMMARY OF LOAN LOSS EXPERIENCE

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

Years Ended December 31,		2009				2008				2007				2006				2005
Balance at Beginning of Year		$	5,553			$	5,459			$	5,594			$	5,860			$	6,144
Charge-Offs:
Commercial, Financial and Agricultural			(911	)			(94	)			(48	)			(19	)			(25	)
Commercial Real Estate			(2,389	)			(767	)			(385	)			(9	)			(78	)
Residential Real Estate			(251	)			(75	)			(67	)			(181	)			(25	)
Consumer			(1,248	)			(795	)			(612	)			(850	)			(1,631	)
Total Charge-Offs			(4,799	)			(1,731	)			(1,112	)			(1,059	)			(1,759	)
Recoveries on Previous Charge-Offs:
Commercial, Financial and Agricultural			2				19				3				24				276
Commercial Real Estate			178				0				0				2				0
Residential Real Estate			1				0				5				0				0
Consumer			415				386				399				567				550
Total Recoveries			596				405				407				593				826
Net Charge-Offs			(4,203	)			(1,326	)			(705	)			(466	)			(933	)
Provision for Loan Losses			6,050				1,420				570				200				649
Balance at End of Year		$	7,400			$	5,553			$	5,459			$	5,594			$	5,860
Ratio of Net Charge-Offs to Average Loans Outstanding			0.71	%			0.26	%			0.14	%			0.09	%			0.19	%

Provisions charged to operations amounted to $6.05 million in 2009 compared to $1.42 million in 2008. The provision for loan 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 charge-off 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 loan losses increased $1.847 million during the year. The primary reason for the increase in the current year was the increase in allocations made for loans individually identified as impaired. At December 31, 2009, loans considered to be impaired totaled $13.50 million with an allowance allocation of $2.058 million. At the end of 2008, loans considered to be impaired were $2.64 million with an allowance allocation of $555 thousand. Loans individually identified as impaired include nonaccrual commercial and commercial real estate loans and loans with their contractual terms modified such that they represent troubled debt restructurings. Impaired loans are carried at the fair value of the underlying collateral, less estimated disposition costs, if repayment of the loan is expected to be solely dependent on the sale of the collateral. Otherwise, impaired loans are carried at the present value of expected cash flows.

The valuation of collateral-dependent impaired loans is a challenging component of our financial reporting process due to the timing of when a loan is identified as impaired and the need to timely close the Company’s books for a given period. Typically, commercial and commercial real estate loans are identified as impaired when they become ninety days past due, or earlier if management believes it is probable that the Company will not collect all amounts due under the terms of the loan agreement. When we identify a loan as impaired and also conclude that the loan is collateral dependent, we perform an internal collateral valuation as an interim measure. We typically obtain an external appraisal to validate our internal collateral valuation as soon as is practical. To the extent that an external appraisal returns a value estimate that is materially different from our internally generated estimate before the release of our interim or annual financial statements, we would adjust the associated specific loss reserve and, if necessary, the Company’s consolidated financial statements for the difference.

The allowance for loan losses increased otherwise during the year due to continued adverse economic conditions and negative asset quality indicators in our loan portfolio. The ratio of nonperforming loans to total loans increased from .97% at December 31, 2008 to 1.66% at December 31, 2009. As of December 31, 2009, total non-performing loans were $10.10 million, compared to $5.34 million at the end of 2008. The ratio of the allowance for loan losses to non-performing loans at December 31, 2009 was 73.25%, compared to 104.05% at December 31, 2008. The increase in non-performing loans is primarily due to the classification of certain commercial real estate and land development loans that are in default according to the terms of the contract. The balance in the allowance for loan losses is $7.400 million or 1.21% of loans at December 31, 2009. This ratio has increased from the 1.01% reported at December 31, 2008.

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

NONPERFORMING ASSETS

December 31,		2009				2008				2007				2006				2005
Nonaccrual loans:
Commercial, Financial and Agricultural		$	1,504			$	342			$	0			$	38			$	40
Commercial Real Estate			5,677				2,820				975				171				249
Residential Real Estate			2,281				1,485				975				975				1,091
Consumer			172				128				77				101				90
Total Nonaccrual Loans		$	9,634			$	4,775			$	2,027			$	1,285			$	1,470
Loans Past Due 90 Days or More			469				562				334				437				547
Total Nonperforming Loans		$	10,103			$	5,337			$	2,361			$	1,722			$	2,017
Other Real Estate Owned			374				65				0				0				92
Total Nonperforming Assets		$	10,477			$	5,402			$	2,361			$	1,722			$	2,109
Loans modified in troubled debt restructuring (1)		$	5,440			$	0			$	0			$	0			$	0
Percentage of Nonperforming Loans to Loans			1.66	%			0.97	%			0.46	%			0.34	%			0.39	%
Percentage of Nonperforming Assets to Total Assets			1.03	%			0.61	%			0.30	%			0.21	%			0.25	%

Interest income from loans would have been $38.339 million if all loans had been current in accordance with their original terms.

Net charge-offs as a percentage of average loans outstanding increased from .26% for 2008 to .71% for 2009. The Company’s net charge-offs were primarily concentrated in commercial, commercial real estate and consumer loans. The net losses in commercial loans accounted for 21.6% of the total net losses, commercial real estate loans accounted for 52.6% of the total net losses, and the consumer loans represented 19.8% of the total.

A significant allocation in our allowance for loan losses is for performing commercial and commercial real estate loans classified by our internal loan review as substandard. Substandard loans are those that exhibit one or more structural weaknesses and there is a distinct possibility that the Bank will suffer a loss on the loan unless the weakness is corrected. Our loss experience on the average balance of this category of loans for the past two years has been approximately 9.27% of the principal balance of these loans, which is management’s allocation for these loans. This equates to an allocation of approximately $1.99 million at the end of 2009 compared to an allocation of $2.16 million at the end of 2008. The allocation decreased primarily due to a reduction in the balance of these loans. Our actual loss experience may be more or less than the amount allocated. At December 31, 2009, the amount of substandard loans that continue to accrue interest is $22.88 million. As always, management is working to address weaknesses in each of these specific loans that may result in loss.

The allowance is allocated among the loan categories based upon the consistent, quarterly procedures determined by management. However, the entire allowance for loan losses is available to absorb future losses in any loan category. The following table details the allocation of the allowance for loan losses at December 31:

		2009								2008								2007								2006								2005
						Loans								Loans								Loans								Loans								Loans
						to Total								to Total								to Total								to Total								to Total
December 31,		Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans
Commercial, Financial and Agricultural		$	1,738				12.5	%		$	933				12.7	%		$	506				8.9	%		$	302				8.0	%		$	439				7.6	%
Residential Real Estate			328				29.7	%			696				31.4	%			1,026				33.1	%			1,084				33.5	%			1,528				32.3	%
Commercial Real Estate			4,111				35.4	%			3,126				35.4	%			2,956				37.6	%			2,910				35.6	%			1,660				32.2	%
Consumer			1,223				22.4	%			798				20.5	%			971				20.4	%			1,298				22.9	%			2,233				27.9	%
		$	7,400				100.0	%		$	5,553				100.0	%		$	5,459				100.0	%		$	5,594				100.0	%		$	5,860				100.0	%

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

The allowance allocated to each of the four loan categories should not be interpreted as an indication that charge-offs in 2010 will occur in the same proportions or that the allocation indicates future charge-off trends. The allowance allocated to the one-to-four family real estate loan category and the consumer loan category is based upon the Company’s allowance methodology for homogeneous loans, and increases and decreases in the balances of those portfolios. In previous years, the indirect installment loan category has represented the largest percentage of loan losses. The one-to-four family real estate loan category represents approximately 29.7% of total loans, but historically has represented a very small percentage of loan losses. For the commercial loan category, which represents only 12.5% of the total loan portfolio, management relies on the Bank’s internal loan review procedures and allocates accordingly based on loan classifications. The commercial real estate loan category represents 35.4% of the total loan portfolio.

LOAN COMMITMENTS AND LINES OF CREDIT

In the normal course of business, the Bank has extended various commitments for credit. Commitments for mortgages, revolving lines of credit and letters of credit generally are extended for a period of one month up to one year. Normally no fees are charged on any unused portion. Normally, an annual fee of two percent is charged for the issuance of a letter of credit.

As of December 31, 2009, there were no concentrations of loans exceeding 10% of total loans that are not disclosed as a category of loans. As of that date also, there were no other interest-earning assets that are either nonaccrual, past due, restructured or non-performing.

INVESTMENT SECURITIES

The investment securities portfolio increased $37.763 million in 2009. Increases in deposits and securities sold under repurchase agreements that were in excess of loan growth were strategically invested. The Company also sold $26.185 million in securities in 2009, resulting in net security gains of $1.017 million.

Our objective in managing the investment portfolio is to preserve and enhance corporate liquidity through investment in primarily short and intermediate term securities which are readily marketable and of the highest credit quality. In general, investment in securities is limited to those funds the Bank feels it has in excess of funds used to satisfy loan demand and operating considerations.

Mortgage-backed securities are created by the pooling of mortgages and issuance of a security. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages. Investments in mortgage-backed securities involve a risk that actual principal prepayments will be greater than estimated prepayments over the life of the security. Prepayment estimates for mortgage-backed securities are performed at purchase to ensure that prepayment assumptions are reasonable considering the underlying collateral for the mortgage-backed securities at issue and current mortgage interest rates and to determine the yield and estimated maturity of the mortgage-backed security portfolio. Prepayments that are faster than anticipated may shorten the life of the security and may result in faster amortization of any premiums paid and thereby reduce the net yield on such securities. During periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. All holdings of mortgage-backed securities were issued by U.S. Government sponsored enterprises.

The following table shows the book value of investment securities by type of obligation at the dates indicated:

TYPE

December 31,		2009				2008				2007
U.S. Treasury Securities		$	101			$	800			$	800
U.S. Government sponsored enterprise debt securities			99,732				43,881				56,076
Mortgage-backed securities			145,580				165,822				88,825
Obligations of States and Political Subdivisions			63,432				60,906				71,395
Other Securities			523				196				3,055
		$	309,368			$	271,605			$	220,151

A summary of debt securities held at December 31, 2009 classified according to maturity and including weighted average yield for each range of maturities is set forth below:

		December 31, 2009
						Weighted
		Fair				Average
Type and Maturity Grouping		Value				Yield (1)
U.S. Treasury Securities
Maturing Within One Year		$	101				0.46	%
U.S. Government Sponsored Enterprise
Debt Securities
Maturing Within One Year		$	1,714				2.41	%
Maturing After One Year But Within Five Years			81,857				2.84	%
Maturing After Five Years But Within Ten Years			6,023				3.88	%
Maturing After Ten Years			10,138				4.71	%
Total U.S. Government Sponsored Enterprise Debt Securities		$	99,732				3.08	%
Mortgage-Backed Securities (2)
Maturing Within One Year		$	33,523				4.12	%
Maturing After One Year But Within Five Years			55,424				4.46	%
Maturing After Five Years But Within Ten Years			25,439				4.56	%
Maturing After Ten Years			31,194				4.09	%
Total Mortgage-Backed Securities:		$	145,580				4.32	%
Obligations of States and Political Subdivisions
Maturing Within One Year		$	1,748				5.65	%
Maturing After One Year But Within Five Years			11,237				5.64	%
Maturing After Five Years But Within Ten Years			29,754				6.03	%
Maturing After Ten Years			20,693				6.37	%
Total Obligations of States and Political Subdivisions		$	63,432				6.07	%
Corporate Debt Securities
Maturing After One Year But Within Five Years		$	264				5.00	%

MANAGEMENT’S DISCUSSION
(Table Dollar Amounts In Thousands except Per Share Data)

Deposits

Deposits represent the Company’s principal source of funds. The deposit base consists of demand deposits, savings and money market accounts and other time deposits. During the year, the Company’s average total deposits increased 13.34% from $632.753 million in 2008 to $717.162 million in 2009. Money market account balances have increased $65.66 million since December 31, 2008. Total time deposits have also increased $42.39 million since 2008 as customers have moved investment dollars out of the equity markets seeking safety and liquidity. The Company prices deposit rates to remain competitive within the market and to retain customers.

Bank Owned Life Insurance

The Company owns bank owned life insurance policies on the lives of certain members of management. The purpose of this transaction is to help fund the costs of employee benefit plans. The cash surrender value of these policies is $11.438 million at December 31, 2009 compared to $11.021 million at December 31, 2008.

Borrowings

Short-term borrowings increased $20.48 million or 19.4% since December 31, 2008. Most of this increase resulted from securities sold under repurchase agreements, increasing $40.44 million, or 48.2%. Long-term borrowings decreased $19.30 million or 41.53%, mainly as a result of prepayment of Federal Home Loan Bank advances. The purpose of the prepayment was to facilitate the sale of certain securities which resulted in realized gains of approximately $510 thousand.

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

The following table presents, as of December 31, 2009, the Company’s significant fixed and determinable contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient and do not include any unamortized premiums or discounts or other similar carrying value adjustments. Further discussion of the nature of each obligation is included in referenced note to the consolidated financial statements.

Commitments		Note																						There-
12/31/2009		Ref.		2010				2011				2012				2013				2014				after
Deposits without maturity		—		$	452,478				—				—				—				—				—
Certificates of deposit		G			233,309				45,650				17,539				8,644				17,625				2,307
Repurchase agreements		H			124,313				—				—				—				—				—
Other short-term borrowed funds		H			1,599				—				—				—				—				—
Federal Home Loan Bank advances		I			1,135				2,487				865				820				11,367				10,249
Other long-term borrowed funds		I			56				60				65				64				—				—
Operating leases		E			61				61				61				61				48				—