FARMERS NATIONAL BANC CORP /OH/

Previous wording

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

Current wording

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

Previous wording

Results of Operations. The following is a comparison of selected financial ratios and other results at or for the three and nine month periods ended September 30, 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 month periods ended March 31, 2025 and 2024:

Previous wording

Net Income. The Company reported net income of $8.5 million, or $0.23 per diluted share, for the quarter ended September 30, 2024 compared to $13.3 million, or $0.36 per diluted share, for the quarter ended September 30, 2023. The results for the third quarter of 2024 were impacted by a single $12.5 million commercial credit backed by office space which resulted in a $4.4 million charge-off along with the establishment of a specific reserve on the credit in the amount of $1.2 million.

Current wording

Net Income. The Company reported net income of $13.6 million, or $0.36 per diluted share, for the quarter ended March 31, 2025 compared to $11.2 million, or $0.30 per diluted share, for the quarter ended March 31, 2024. The results for the first quarter of 2025 were impacted by pretax losses on the sale of investment securities and other assets totaling $1.3 million.

Previous wording

Net Interest Income. Net interest income for the three months ended September 30, 2024, was $31.9 million compared to $33.8 million for the three months ended September 30, 2023. A 20 basis point decline in the net interest margin was the primary reason for this decrease.

Current wording

Net Interest Income. Net interest income for the three months ended March 31, 2025, was $34.2 million compared to $31.7 million for the three months ended March 31, 2024. A 15 basis point increase in the net interest margin was the primary reason for this increase.

Previous wording

The net interest margin for the three month period ended September 30, 2024, was 2.66% compared to 2.86% for the same period in 2023. Interest-earning asset yields increased 23 basis points in the third quarter of 2024 compared to the third quarter of 2023 while the cost of interest-bearing liabilities increased 54 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 Federal Reserve rate hiking cycle which 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.

Current wording

The net interest margin for the three month period ended March 31, 2025, was 2.85% compared to 2.70% for the same period in 2024. Interest-earning asset yields increased 9 basis points in thefirst quarter of 2025 compared to thefirst quarter of 2024 while the cost of interest-bearing liabilities decreased 9 basis points when comparing these two periods. This decrease in funding costs has been due to the reduction in the Fed Funds rate in the fourth quarter of 2024. Deposit costs have declined as a result of this action.

Previous wording

Service charges on deposit accounts increased $280 thousand to $2.0 million for the third quarter of 2024 compared to $1.7 million for the third quarter in 2023. The Company undertook a review of all service charges in late 2023 and early 2024 and implemented fee increases across deposit product lines in the second quarter of 2024. Trust fees increased by $217 thousand to $2.5 million at September 30, 2024, from $2.3 million at September 30, 2023. The increase was due to continued growth in the business unit. Insurance agency commissions grew to $1.4 million in the third quarter of 2024 from $1.1 million in the third quarter of 2023. The increase has been driven by strong growth in fixed annuity sales. Losses on the sale of securities totaled $403 thousand in the third quarter of 2024 compared to losses on the sale of securities of $624 thousand during the third quarter of 2023. Net gains on the sale of loans increased to $506 thousand in the third quarter of 2024 compared to $395 thousand in the third quarter of 2023. Greater saleable volume drove this increase. Other mortgage banking fee income was a loss of $168 thousand for the third quarter of 2024 compared to income of $185 thousand during the third quarter of 2023. The decline in income was due to an impairment charge on the Company’s higher coupon mortgage servicing right tranches in the third quarter of 2024. Debit card income grew to $2.0 million in the third quarter of 2024 from $1.8 million in the third quarter of 2023 as better volumes were realized in the current period. Other noninterest income increased from $1.1 million in the third quarter of 2023 to $2.6 million in the third quarter of 2024. The Company recorded $854 thousand more in SBIC income in the third quarter of 2024 compared to the same period in 2023. In addition, the Company purchased $3.0 million of its subordinated debt during the third quarter of 2024 recording a gain of $444 thousand. In the third quarter of 2023, the Company had no gains from the purchase of subordinated debt but instead recorded losses of $110 thousand on assets held for sale.

Current wording

Service charges on deposit accounts increased $175 thousand to $1.8 million for thefirst quarter of 2025 compared to $1.6 million for thefirst quarter in 2024. The Company undertook a review of all service charges in late 2023 and early 2024 and implemented fee increases across deposit product lines in the second quarter of 2024. Bank owned life insurance income increased $103 thousand during the first quarter of 2025 to $810 thousand compared to $707 thousand in the first quarter of 2024. The Company purchased an additional $15.0 million in policies during the first quarter of 2025 and policy crediting rates have increased over the last twelve months. Trust fees increased to $2.6 million at March 31, 2025, from $2.5 million at March 31, 2024. The increase was due to continued growth in the business unit. Insurance agency commissions grew to $1.7 million in thefirst quarter of 2025 from $1.5 million in thefirst quarter of 2024. The increase has been driven by growth in fixed annuity sales. Losses on the sale of securities totaled $1.3 million in thefirst quarter of 2025 compared to losses on the sale of securities of $2.1 million during thefirst quarter of 2024. The bank restructured $23.9 million at the end of the first quarter of 2025 resulting in the loss realized on the sale. Retirement plan consulting fees increased to $798 thousand in the first quarter of 2025 from $617 thousand in the first quarter of 2024 primarily due to the acquisition of Crest Retirement Advisors LLC in late December of 2024. Net gains on the sale of loans increased to $326 thousand in thefirst quarter of 2025 compared to $297 thousand in thefirst quarter of 2024. Greater saleable volume drove this increase. Other mortgage banking fee income was $147 thousand for thefirst quarter of 2025 compared to income of $125 thousand during thefirst quarter of 2024. Debit card income grew to $1.9 million in thefirst quarter of 2025 from $1.6 million in thefirst quarter of 2024 as better volumes were realized in the current period. Other noninterest income increased from $1.1 million in thefirst quarter of 2024 to $1.2 million in thefirst quarter of 2025.

Previous wording

Income Taxes. Income tax expense was $1.6 million for the three months ended September 30, 2024 compared to $2.3 million for the three months ended September 30, 2023. The decrease in tax expense was primarily due to the decline in income before income taxes.

Current wording

Income Taxes. Income tax expense was $2.8 million for the three months ended March 31, 2025 compared to $2.2 million for the three months ended March 31, 2024. The increase in tax expense was primarily due to higher income before income taxes in 2025.

Previous wording

Cash and Cash Equivalents. Cash and cash equivalents increased $85.5 million during the first nine months of 2024 to $189.1 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 September 30, 2024.

Current wording

Cash and Cash Equivalents. Cash and cash equivalents increased $27.5 million during the first three months of 2025 to $113.3 million from $85.7 million at December 31, 2024. The increase in the cash balances was primarily due to the Company intentionally holding more liquidity on its balance sheet at March 31, 2025.

Previous wording

Loans. Net loans (excluding loans held for sale) increased to $3.28 billion at September 30, 2024 from $3.20 billion at December 31, 2023. The increase in 2024 has been due to growth in every major category of loans.

Current wording

Loans. Net loans (excluding loans held for sale) decreased to $3.25 billion at March 31, 2025 from $3.27 billion at December 31, 2024. The decrease in 2025 is primarily due to reductions in commercial and construction loans.

Previous wording

The Company's allowance for credit losses increased to $36.2 million for the period ended September 30, 2024, from $34.4 million for the period ended December 31, 2023. This increase was primarily driven by loan growth and the $1.2 million specific reserve placed on the one commercial loan in the third quarter of 2024. 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 $35.5 million for the period ended March 31, 2025, from $35.9 million for the period ended December 31, 2024. This decline was primarily driven by a reduction in loan growth. 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 to $4.36 billion at September 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. In addition, the Company acquired $74.9 million of brokered time deposits which it used to pay down short-term borrowings.

Current wording

Deposits. Total deposits increased to $4.48 billion at March 31, 2025 from $4.27 billion at December 31, 2024. This increase was primarily due to growth in interest-bearing deposits from seasonality of public funds and customers seeking higher yields on their deposit balances. In addition, the Company acquired $85.0 million of brokered time deposits which it used to pay down short-term borrowings.

Previous wording

Short-term Borrowings. Total short-term borrowing balances decreased from $355.0 million at December 31, 2023 to $285.0 million at September 30, 2024. This decrease was due to the Company using the proceeds from brokered time deposits to pay down short-term borrowings.

Current wording

Short-term Borrowings. Total short-term borrowing balances decreased from $305.0 million at December 31, 2024 to $102.0 million at March 31, 2025. This decrease was due to the Company using the proceeds from deposits to pay down short-term borrowings.

Previous wording

Total Stockholders' Equity. Total stockholders’ equity increased to $439.7 million at September 30, 2024 from $404.4 million at December 31, 2023. The increase was primarily due to a $21.6 million reduction in the accumulated other comprehensive loss offset by growth in retained earnings of $12.4 million.

Current wording

Total Stockholders' Equity. Total stockholders’ equity increased to $429.1 million at March 31, 2025 from $406.0 million at December 31, 2024. The increase was primarily due to a $16.0 million decrease in the accumulated other comprehensive loss coupled with growth in retained earnings of $7.2 million due to $13.6 million of net income recognized during the quarter partially offset by dividends paid on outstanding common shares.

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 September 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 10.91%, total risk-based capital ratio stood at 14.34%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 11.39% and 8.20%, respectively, at September 30, 2024. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of September 30, 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 March 31, 2025, 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 11.44%, total risk-based capital ratio stood at 14.87%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 11.92% and 8.52%, respectively, at March 31, 2025. Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2025.

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 2.00% from 4Q2024 to 4Q2025 U.S. PCE inflation of 2.10%, and U.S. unemployment of 4.40%, 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 1.70% from 4Q2024 to 4Q2025, U.S. PCE inflation of 2.70%, and U.S. unemployment of 4.40%, 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

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 September 30, 2024, on a consolidated basis, Farmers had intangibles of $20.9 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 March 31, 2025, on a consolidated basis, Farmers had intangibles of $20.0 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 September 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 September 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 September 30, 2024, the Bank had no outstanding balances with the FHLB. Additional borrowing capacity at the FHLB was approximately $695.8 million at September 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.

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 March 31, 2025, 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, 2025 and December 31, 2024. Management feels that its liquidity position is adequate and will continue to monitor the position on a monthly basis. As of March 31, 2025, the Bank had $102.0 million in outstanding balances with the FHLB. Additional borrowing capacity at the FHLB was approximately $749.3 million at March 31, 2025. 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 $731.7 million at September 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 September 30, 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 $734.2 million at March 31, 2025, and $692.4 million at December 31, 2024. Additionally, the Company has committed up to $20.2 million in subscriptions in SBIC investment funds. At March 31, 2025, the Company had invested $14.8 million in these funds.