FARMERS NATIONAL BANC CORP OH

Previous wording

Results of Operations. The following is a comparison of selected financial ratios and other results at or for the three month periods ended March 31, 2024 and 2023:

Current wording

Results of Operations. The following is a comparison of selected financial ratios and other results at or for the three and six month periods ended June 30, 2024 and 2023:

Previous wording

Net Interest Income. Net interest income for the quarter ended March 31, 2024, was $31.7 million compared to $36.6 million for the same period in 2023. A 37 basis point decline in the net interest margin along with a slightly smaller earning asset base were the primary drivers of this decrease.

Current wording

Net Interest Income. Net interest income for the three months ended June 30, 2024, was $32.1 million compared to $34.6 million for the three months ended June 30, 2023. A 21 basis point decline in the net interest margin along with a slightly smaller earning asset base were the primary drivers of this decrease.

Previous wording

The net interest margin for the three months ended March 31, 2024, was 2.70% compared to 3.07% for the same period in 2023. In comparing the first quarter of 2024 to the same period in 2023, interest-earning asset yields increased 38 basis points, while the cost of interest-bearing liabilities increased 97 basis points. This increase in funding costs has been due to the rapid increase in deposit rates, intense competition for deposits, the continued Federal Reserve rate hiking cycle and runoff of deposit balances which are being replaced by much costlier wholesale funding. This increase in funding costs continues to outstrip the increases on the yield of interest-earning assets pushing the net interest margin lower.

Current wording

The net interest margin for the three month period ended June 30, 2024, was 2.71% compared to 2.92% for the same period in 2023. Interest-earning asset yields increased 33 basis points in the second quarter of 2024 compared to the second quarter of 2023 while the cost of interest-bearing liabilities increased 69 basis points when comparing these two periods. This increase in funding costs has been due to the rapid increase in deposit rates, intense competition for deposits and the continued Federal Reserve rate hiking cycle which has resulted in an inverted yield curve. This increase in funding costs continues to outstrip the increases on the yield of interest-earning assets pushing the net interest margin lower.

Previous wording

Provision for Credit Losses and Provision for Unfunded Loans. The Company recorded a credit for credit losses and unfunded loans of $449 thousand during the first quarter of 2024 compared to a provision for credit losses and unfunded loans of $8.6 million for the first quarter of 2023. Included in the $8.6 million figure in 2023 was a Day 1 provision for credit losses and provision for unfunded loans under the current expected credit loss model ("CECL") of $7.7 million related to the acquisition of Emlenton. There was no Day 1 provision recorded in the first three months of 2024. The credit for credit losses and unfunded loans in the first three months of 2024 was largely attributed to shrinkage in outstanding loan balances, a reduction is specific reserves and improvements in the Company's loss rates that anchor the qualitative factors.

Current wording

For the first six months of 2024, the Company recorded a provision for credit losses of $663 thousand compared to a provision for credit losses and unfunded loans of $8.6 million for the second quarter of 2023. Included in the $8.6 million figure in 2023 was a Day 1 provision for credit losses and provision for unfunded loans under the current expected credit loss model ("CECL") of $7.7 million related to the acquisition of Emlenton. There was no Day 1 provision recorded in the first six months of 2024.

Previous wording

Service charges on deposit accounts were $1.6 million for the first quarter of 2024 compared to $1.4 million for the same period in 2023 due to increased activity. Bank owned life insurance income increased to $707 thousand in the first quarter from $547 thousand in the first quarter of 2023. A death benefit of $83 thousand in 2024 and higher earnings credit on the policies drove the increase. Trust fees increased by $206 thousand in the first quarter of 2024 compared to the same period in 2023 due to continued strong growth in this line of business. Likewise, insurance commissions, retirement consulting fees and investment commissions all exhibited solid growth in the first quarter of 2024 compared to the first quarter of 2023. Debit card income declined $222 thousand to $1.6 million in the first quarter of 2024 compared to $1.8 million for the first quarter of 2023. Average customer spend per transaction has declined year over year. Other noninterest income declined to $1.1 million for the first three months of 2024 compared to $1.3 million for the first three months of 2023 as the Company received less SBIC income from its investments in 2024 compared to 2023.

Current wording

Service charges on deposit accounts increased by $496 thousand in the first six months of 2024 compared to the same period in 2023 due to the fee increases discussed above. Bank owned life insurance income increased to $1.4 million for the six months ended June 30, 2024 compared to $1.1 million for the six months ended June 30, 2023 as crediting rates on the insurance policies continue to increase. Trust fees increased to $5.4 million in the first six months of 2024 from $4.8 million in the first six months of 2023 due to continued strong growth in this line of business. Other noninterest income declined to $1.3 million in the first six months of 2024 from $1.8 million in the first six months of 2023. The Company recorded write downs totaling $391 thousand on other assets held for sale during the six months ended June 30, 2024 compared to $40 thousand of write downs for the six months end June 30, 2023.

Previous wording

Noninterest Expense. Noninterest expense was $27.0 million for the first three months of 2024 compared to $30.7 million for the first three months of 2023. This decrease was primarily driven by the Company recording $4.3 million in merger related charges in 2023. There were no merger related charges recorded in 2024. Salaries and employee benefits increased to $15.1 million in the first quarter of 2024 compared to $14.6 million in the first quarter of 2023. The increase was primarily driven by salary increases associated with employee raises. Occupancy and equipment expense decreased by $139 thousand in the first quarter of 2024 compared to the first quarter of 2023 primarily due to several branches being closed. FDIC and state and local taxes increased $123 thousand to $1.3 million for the first three months of 2024 compared to $1.2 million for the first three months of 2023 due to an increase in the FDIC assessment rate. Professional fees increased $140 thousand for the three months ended March 31, 2024, compared to the first quarter of 2023 primarily due to increased legal fees. Intangible amortization declined $220 thousand in the first three months of 2024 to $688 thousand compared to $909 thousand for the first three months of 2023. The decrease was primarily driven by the amortization from a prior acquisition running off. Other noninterest expense increased $309 thousand in the first quarter of 2024 compared to the first quarter of 2023 due to increases in several categories of expense.

Current wording

For the six months ended June 30, 2024, noninterest expense decreased to $53.4 million from $57.1 million for the six months ended June 30, 2023. In 2023, the Company incurred $4.8 million of merger related costs while no merger costs were incurred in 2024. Salaries and employee benefits increased to $29.6 million in the first six months of 2024 compared to $28.3 million in the first six months of 2023. The increase was primarily driven by salary increases associated with employee raises along with increased healthcare costs. Occupancy and equipment expense decreased by $183 thousand in the first half of 2024 compared to the first half of 2023 primarily due to several branches being closed. FDIC and state and local taxes decreased $186 thousand to $2.5 million for the first six months of 2024 compared to $2.7 million for the first six months of 2023 due to improvements in the Bank's FDIC assessment variables. Professional fees increased $144 thousand for the six months ended June 30, 2024, compared to the first six months of 2023 primarily due to increased legal fees. Intangible amortization declined $813 thousand in the first six months of 2024 to $1.3 million compared to $2.1 million for the first six months of 2023. This decrease was driven by accelerated amortization that occurred in the first half of 2023 that did not reoccur in 2024 and amortization from a prior acquisition running off. Other noninterest expense increased $855 thousand in the first half of 2024 compared to the first half of 2023 due to increases in several categories of expense.

Previous wording

Income Taxes. Income tax expense totaled $2.2 million for the three months ended March 31, 2024 compared to $639 thousand for the three months ended March 31, 2023. The increase in tax expense was primarily due to the increase in income before income taxes. In addition, the Company dissolved Farmers National Captive, Inc. in November of 2023 so the Company is no longer receiving the tax benefits associated with this business.

Current wording

Income tax expense increased from $3.3 million for the six months ended June 30, 2023 to $4.6 million for the six months ended June 30, 2024. The increase in tax expense was primarily due to the increase in income before income taxes. In addition, the Company dissolved Farmers National Captive, Inc. in November of 2023 so the Company is no longer receiving the tax benefits associated with this business.

Previous wording

Cash and Cash Equivalents. Cash and cash equivalents increased $45.0 million during the first three months of 2024 to $148.6 million from $103.7 million at December 31, 2023. The increase in the cash balances was primarily due to the Company intentionally holding more liquidity on its balance sheet at March 31, 2024.

Current wording

Cash and Cash Equivalents. Cash and cash equivalents increased $77.3 million during the first six months of 2024 to $181.0 million from $103.7 million at December 31, 2023. The increase in the cash balances was primarily due to the Company intentionally holding more liquidity on its balance sheet at June 30, 2024.

Previous wording

Loans. Net loans (excluding loans held for sale) declined to $3.15 billion at March 31, 2024 from $3.16 billion at December 31, 2023. The decline through the first three months of 2024 has been due to paydowns and soft loan demand in the market.

Current wording

Loans. Net loans (excluding loans held for sale) increased to $3.20 billion at June 30, 2024 from $3.16 billion at December 31, 2023. The increase through the first six months of 2024 has been due primarily to growth in the commercial real estate and consumer segment of the loan portfolio, including 1-4 family residential, home equity lines of credit and indirect auto loans.

Previous wording

The Company's allowance for credit losses decreased to $33.2 million for the period ended March 31, 2024, from $34.4 million for the period ended December 31, 2023. This decrease was primarily driven by shrinkage in the loan portfolio along with improvements in the Company's credit metrics which have had a favorable impact on the Company's quantitative and qualitative measures within the CECL model. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.

Current wording

The Company's allowance for credit losses decreased to $34.0 million for the period ended June 30, 2024, from $34.4 million for the period ended December 31, 2023. This decrease was primarily driven by improvements in the Company's credit metrics which have had a favorable impact on the Company's quantitative and qualitative measures within the CECL model. The Company estimates the ACL based on the amortized cost basis of the underlying loan and has made an accounting policy election to exclude accrued interest from the loan’s amortized cost basis and the related measurement of the ACL. Estimating the amount of the ACL is a function of a number of factors, including but not limited to changes in the loan portfolio, net charge-offs, trends in past due and nonaccrual loans, and the level of potential problem loans, all of which may be susceptible to significant change.

Previous wording

Deposits. Total deposits increased by $20.7 million to $4.20 billion at March 31, 2024 from $4.18 billion at December 31, 2023. This increase was primarily due to growth in interest-bearing deposits as customers seek higher yields on their deposit balances.

Current wording

Deposits. Total deposits increased to $4.21 billion at June 30, 2024 from $4.18 billion at December 31, 2023. This increase was primarily due to growth in interest-bearing deposits as customers seek higher yields on their deposit balances offset by declines in non-interest bearing deposits..

Previous wording

Total Stockholders' Equity. Total stockholders’ equity declined to $397.0 million at March 31, 2024 from $404.4 million at December 31, 2023. The decrease was primarily due to a $12.4 million increase in the accumulated other comprehensive loss offset by growth in retained earnings of $4.9 million.

Current wording

Total Stockholders' Equity. Total stockholders’ equity declined to $396.7 million at June 30, 2024 from $404.4 million at December 31, 2023. The decrease was primarily due to a $18.7 million increase in the accumulated other comprehensive loss offset by growth in retained earnings of $10.3 million.

Previous wording

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. At March 31, 2024, the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized. The Company’s common equity tier 1 to risk weighted assets was 10.88%, total risk-based capital ratio stood at 14.38%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 11.37% and 8.19%, respectively, at March 31, 2024. The Company opted not to phase in, over 3 years, the effects of the initial CECL entry to equity for the implementation of ACS 326, recorded on January 1, 2021. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2024.

Current wording

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company. At June 30, 2024, the Company is required to maintain 4.5% common equity tier 1 to risk weighted assets excluding the conservation buffer to be adequately capitalized. The Company’s common equity tier 1 to risk weighted assets was 10.94%, total risk-based capital ratio stood at 14.42%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 11.43% and 8.26%, respectively, at June 30, 2024. The Company opted not to phase in, over 3 years, the effects of the initial CECL entry to equity for the implementation of ACS 326, recorded on January 1, 2021. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of June 30, 2024.

Previous wording

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s 2023 Form 10-K. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses and if there is any impairment of goodwill or other intangible. Additional information regarding these policies is included in the notes to the aforementioned 2023 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

Current wording

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s 2023 Form 10-K. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses and if there is any impairment of goodwill or other intangible. Additional information regarding these policies is included in the notes to the aforementioned 2023 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

Previous wording

For example, compared to the Company’s central scenario that is based on a four-quarter forecasted change in U.S. real GDP of 2.10% from 4Q2023 to 4Q2024, U.S. PCE inflation of 2.40%, and U.S. unemployment of 4.00%, the Company’s relative adverse scenario assumes a four-quarter forecast with a contraction of U.S. real GDP, a PCE inflation between 5.00% and 7.00% and an elevated U.S. unemployment rate between 6.00% and 7.00%. This analysis is not intended to estimate expected future changes in the allowance for credit losses, for a number of reasons, including:

Current wording

For example, compared to the Company’s central scenario that is based on a four-quarter forecasted change in U.S. real GDP of 2.10% from 4Q2023 to 4Q2024, U.S. PCE inflation of 2.60%, and U.S. unemployment of 4.00%, the Company’s relative adverse scenario assumes a four-quarter forecast with a contraction of U.S. real GDP, a PCE inflation between 5.00% and 7.00% and an elevated U.S. unemployment rate between 6.00% and 7.00%. This analysis is not intended to estimate expected future changes in the allowance for credit losses, for a number of reasons, including:

Previous wording

An increase of approximately $683 thousand for residential real estate loans and lending-related commitments

Current wording

An increase of approximately $642 thousand for residential real estate loans and lending-related commitments

Previous wording

An increase of approximately $1.19 million for commercial real non-owner occupied loans and lending-related commitments

Current wording

An increase of approximately $1.17 million for commercial real estate non-owner occupied loans and lending-related commitments

Previous wording

The PD portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, or is partially or wholly charged-off. Typically, a one-year time period is used to asses PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. LGD is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

Current wording

The PD portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, or is partially or wholly charged-off. Typically, a one-year time period is used to assess PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. LGD is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

Previous wording

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information. At March 31, 2024, on a consolidated basis, Farmers had intangibles of $22.2 million subject to amortization and $167.4 million in goodwill, which was not subject to periodic amortization.

Current wording

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. GAAP establishes standards for the amortization of acquired intangible assets and the impairment assessment of goodwill. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. The Company’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of the Company’s subsidiaries to provide quality, cost-effective services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. GAAP requires an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The fair value of the goodwill is estimated by reviewing the past and projected operating results for the subsidiaries and comparable industry information. At June 30, 2024, on a consolidated basis, Farmers had intangibles of $21.5 million subject to amortization and $167.4 million in goodwill, which was not subject to periodic amortization.

Previous wording

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, access to funds in the wholesale arena, 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 major domestic banks. At March 31, 2024, this line of credit totaled $25.0 million of which the Bank had not borrowed against. In addition, the Company has a revolving line of credit with a correspondent bank totaling $5.0 million. There was no balance on this line at March 31, 2024 and December 31, 2023. Management feels that its liquidity position is adequate and will continue to monitor the position on a monthly basis. As of March 31, 2024, the Bank had $60.0 million in outstanding balances with the FHLB. Additional borrowing capacity at the FHLB was approximately $739.9 million at March 31, 2024. The Company also has access to the Federal Reserve Discount Window, which provides an additional source of funds with the posting of collateral. The Bank views its membership in the FHLB as a solid source of liquidity.

Current wording

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed. These other sources include, but are not limited to, access to funds in the wholesale arena, 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 major domestic banks. At June 30, 2024, this line of credit totaled $25.0 million of which the Bank had not borrowed against. In addition, the Company has a revolving line of credit with a correspondent bank totaling $5.0 million. There was no balance on this line at June 30, 2024 and December 31, 2023. Management feels that its liquidity position is adequate and will continue to monitor the position on a monthly basis. As of June 30, 2024, the Bank had $121.0 million in outstanding balances with the FHLB. Additional borrowing capacity at the FHLB was approximately $679.7 million at June 30, 2024. The Company also has access to the Federal Reserve Discount Window, which provides an additional source of funds with the posting of collateral. The Bank views its membership in the FHLB as a solid source of liquidity.

Previous wording

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $769.2 million at March 31, 2024, and $805.4 million at December 31, 2023. Additionally, the Company has committed up to $20.2 million in subscriptions in SBIC investment funds. At March 31, 2024, the Company had invested $16.5 million in these funds.

Current wording

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets. The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The same credit policies are used in making commitments as are used for on-balance sheet instruments. Collateral is required in instances where deemed necessary. Undisbursed balances of loans closed include funds not disbursed but committed for construction projects. Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit. Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily used to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Total unused commitments were $733.8 million at June 30, 2024, and $805.4 million at December 31, 2023. Additionally, the Company has committed up to $20.2 million in subscriptions in SBIC investment funds. At June 30, 2024, the Company had invested $16.5 million in these funds.