Farmers National Banc Corp. (Farmers) (NASDAQ: FMNB) today reported financial results for the three months ended March 31, 2020.

Net income for the three months ended March 31, 2020 was $8.6 million, or $0.30 per diluted share, which compares to $8.4 million, or $0.30 per diluted share, for the three months ended March 31, 2019 and $9.7 million or $0.35 per diluted share for the linked quarter. Net income excluding acquisition costs (non-GAAP) for the quarter ended March 31, 2020 was $9.7 million or $0.34 per share, compared to $8.4 million or $0.30 per share for the same quarter in 2019 and $9.8 million or $0.35 per share for the most recent quarter. Annualized return on average assets and annualized return on average equity were 1.32% and 11.53%, respectively, for the three month period ending March 31, 2020, compared to 1.45% and 12.71% for the same three month period in 2019, and 1.58% and 12.78% for the linked quarter. Excluding acquisition costs, annualized return on average assets and annualized return on equity (non-GAAP) would have been 1.48% and 12.95% respectively, for the quarter ended March 31, 2020. Farmers’ annualized return on average tangible equity (non-GAAP) was 13.81% for the quarter ended March 31, 2020 compared to 14.99% for the same quarter in 2019 and 15.03% for the linked quarter. Excluding acquisition costs, annualized return on average tangible equity (non-GAAP) would have been 15.50% for the quarter ended March 31, 2020.

Kevin J. Helmick, President and CEO, stated, “As we all experience the pressure that the COVID-19 pandemic has caused around the world, the people at Farmers remain actively engaged and are focused on helping our clients navigate through this challenging time. We arrive here uniquely prepared to address what’s ahead - at the end of 2019, the Company had $264 million in total regulatory capital and strong tangible common equity. As a result of the economic uncertainty, the Company has suspended its stock repurchase program in order to preserve capital."

In response to the rapidly evolving COVID-19 pandemic, the Company focused first on the well-being of its people, customers and communities. Preventative health measures were put in place including elimination of business related travel requirements, mandatory work from home for all employees able to do so and social distancing precautions for all employees in the office. The Company also restricted access to branch lobbies to appointment only and continues to conduct preventative cleaning at all offices and branches. The Company also focused on business continuity measures, including forming a COVID-19 task force, monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors.

Farmers is offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic. Through March 31, 2020, the Company has processed approximately 168 consumer payment deferral requests for a total of $8.3 million, including approximately 41 related to residential mortgages totaling $5.5 million. From a business customer perspective, the Company has processed approximately 170 payment deferral requests totaling $89.1 million. Farmers is also a preferred SBA lender and has dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the new Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to obtain SBA approval and receive funding as quickly as possible. Through April 24, 2020, the Company has facilitated PPP assistance to 726 business customers totaling approximately $145.6 million.

On January 7, 2020, Farmers announced it completed the merger of Maple Leaf Financial (“Maple Leaf”), the holding company for Geauga Savings Bank, with branches located in Cuyahoga and Geauga Counties in Ohio. The transaction increases Farmers’ market share in Cuyahoga and Geauga Counties and enables Farmers to continue building local scale throughout Northeast Ohio. As of January 7, 2020, Maple Leaf had total assets of $277.0 million, which included gross loans of $182.1 million, deposits of $183.1 million and equity of $32.1 million.

2020 First Quarter Financial Highlights

• Loan growth
  Total loans were $1.98 billion at March 31, 2020, compared to $1.74 billion at March 31, 2019, representing an increase of 13.4%. Excluding the $182.1 million of loans added from the Maple Leaf acquisition, loan growth was 2.9%. The increase in loans was a direct result of Farmers’ focus on loan growth utilizing a talented lending and credit team, while adhering to a sound underwriting discipline. The increase in loans has occurred in the agricultural, commercial, commercial real estate, and residential real estate loan portfolios. Loans now comprise 78.6% of the Bank's average earning assets for the quarter ended March 31, 2020, down slightly compared to 79.3% for the same period in 2019. The growth in loans has resulted in a 12.2% increase in tax equated loan interest income, including fees, in the first quarter of 2020 compared to the same quarter in 2019.
• Deposits and Liquidity
  Farmers maintains, in the opinion of management, liquidity sufficient to satisfy depositor’s requirements and meet the credit needs of its customers. The Company’s non-brokered deposits increased 15% from $1.9 billion at March 31, 2019 to $2.1 billion at March 31, 2020. The loan to deposit ratio at March 31, 2020 stands at 87.99%, a slight improvement compared to 89.22% one year ago. The Company has additional borrowing capacity at the Federal Home Loan Bank of Cincinnati and approved lines of credit at two domestic banks. Funds have also been accessed through the Federal Reserve’s PPP Liquidity Facility.
• Loan quality
  Non-performing assets to total assets remain at a low level, currently at 0.45%, but increased from the 0.26% reported in the most recent quarter. Early stage delinquencies were $19.1 million, or 0.96% of total loans, at March 31, 2020, compared to $11.9 million, or 0.66% of total loans, for the quarter ended December 31, 2019. Net charge-offs for the current quarter were $635 thousand, compared to $365 thousand in the same quarter in 2019, and total net charge-offs as a percentage of average net loans outstanding is 0.13% for the quarter ended March 31, 2020, compared to 0.09% for the most recent quarter. As a result of the increased non-performing assets and early stage delinquencies, and the increased level of net charge-offs, the Company increased its provision for loan losses to $1.1 million, an increase of $500 thousand compared to the $600 thousand provision recorded in the fourth quarter of 2019. This additional provision is due to necessary amount required for the allowance as a result of the impact of increased negative economic factors that exist in the current business environment. As an overall percentage of loans, the allowance for loan losses decreased to 0.76% during the current quarter compared to 0.80% during the quarter ended December 2019. This decrease was mainly due to the additional loans acquired in the Maple Leaf merger that are recorded at fair market value and require no additional allowance. Excluding the loans acquired in the Maple Leaf merger, the allowance as a percentage of loans would have been 0.92%. The amount of loans made to vulnerable industries (Restaurants, Transportation, Arts/Entertainment, Hotels and Oil & Gas) is less than 4.1% of our total loan portfolio. It is also important to note that the average FICO score of our consumer loan portfolio stands at a healthy 759.
  
  In accordance with the accounting relief provisions of the CARES Act, the Bank has postponed the adoption of the current expected credit losses (“CECL”) accounting standards, primarily due to the impact the COVID-19 pandemic is having on the economy and the lack of reasonable and supportable economic forecasts. Had we adopted CECL as of January 1, 2020, the increase to our allowance for loan losses estimated to have ranged from 15% to 20% of the amount recorded at December 31, 2019, which did not consider potential COVID-19 pandemic related impacts.
• Net interest margin
  The net interest margin for the three months ended March 31, 2020 was 3.75%, a 6 basis points decrease from the quarter ended March 31, 2019, and 9 basis points less than the 3.84% reported for the linked quarter. In comparing the first quarter of 2020 to the same period in 2019, asset yields decreased 5 basis points, while the cost of interest-bearing liabilities decreased 1 basis point. Most of the decrease in the asset yields was the result of lower rates earned on tax-exempt securities, declining from 3.93% to 3.90%. Loan yields also dropped one basis point from 5.06% to 5.05%. Although the cost of interest bearing liabilities decreased one basis point, this was offset by the cost of time deposits, which increased from 1.83% to 1.98%, however the 1.98% remains unchanged to the most recent quarter. The net interest margin is impacted by the additional accretion as a result of the discounted loan portfolios acquired in the previous mergers, which increased the net interest margin by 6 basis points for the quarter ended March 31, 2020 and 4 basis points for the quarter ended March 31, 2019.
• Noninterest income
  Noninterest income increased 18.3% to $7.7 million for the quarter ended March 31, 2020 compared to $6.5 million in the same quarter in 2019. Gains on the sales of mortgage loans increased $695 thousand or 104%, investment commissions increased $163 thousand or 63%, insurance agency commissions grew $80 thousand or 10%, and security gains increased $147 thousand or 1,470% in comparing the first quarter of 2020 to the same quarter in 2019.
• Noninterest expenses
  Farmers has remained committed to managing the level of noninterest expenses. Total noninterest expenses for the first quarter of 2020 increased 16.3% to $18.6 million compared to $16.0 million in the same quarter in 2019, primarily as a result of increases in merger related costs of $1.3 million and salaries and employee benefits of $875 thousand or 9.4% and a $138 thousand or 158.6% increase in FDIC insurance expense. Annualized noninterest expenses excluding acquisition costs (non-GAAP) measured as a percentage of quarterly average assets decreased from 2.77% in the first quarter of 2019 to 2.63% in the first quarter of 2020.
• Efficiency ratio
  The efficiency ratio for the quarter ended March 31, 2020 increased to 59.72% compared to 57.83% for the same quarter in 2019. Excluding acquisition costs (non-GAAP) of $1.3 million, the efficiency ratio improved to 55.40% in the first quarter of 2020. The improvement in net interest income and noninterest income in the first quarter of 2020 was offset by a slightly higher level of noninterest expenses as explained in the preceding paragraphs.

Mr. Helmick added, "We want to extend our sincere best wishes to all those directly fighting the Coronavirus in Northeast Ohio, Western Pennsylvania and across the country. Farmers is focusing its capital, liquidity, financial strength and expertise on the broad-based solutions required to respond to this crisis," Helmick continued. "Thanks to the success of our pandemic response plan and the tireless work of our staff, we are prepared to support our communities as long as they need us.”

Founded in 1887, Farmers National Banc Corp. is a diversified financial services company headquartered in Canfield, Ohio, with $2.7 billion in banking assets. Farmers National Banc Corp.’s wholly-owned subsidiaries are comprised of The Farmers National Bank of Canfield, a full-service national bank engaged in commercial and retail banking with 42 banking locations in Mahoning, Trumbull, Columbiana, Stark, Wayne, Medina, Geauga and Cuyahoga Counties in Ohio and Beaver County in Pennsylvania, and Farmers Trust Company, which operates five trust offices and offers services in the same geographic markets. Total wealth management assets under care at March 31, 2020 are $2.2 billion. Farmers National Insurance, LLC and Bowers Insurance Agency, Inc., wholly-owned subsidiaries of The Farmers National Bank of Canfield, offer a variety of insurance products.

Non-GAAP Disclosure

This press release includes disclosures of Farmers’ tangible common equity ratio, return on average tangible assets, return on average tangible equity and net income excluding costs related to acquisition activities, which are financial measures not prepared in accordance with generally accepted accounting principles in the United States (GAAP). A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed by GAAP. Farmers believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and Farmers’ marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with GAAP. The reconciliations of non-GAAP financial measures are included in the tables following Consolidated Financial Highlights below.

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about Farmers’ financial condition, results of operations, asset quality trends and profitability. Forward-looking statements are not historical facts but instead represent only management’s current expectations and forecasts regarding future events, many of which, by their nature, are inherently uncertain and outside of Farmers’ control. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions, as well as any statements related to future expectations of performance or conditional verbs, such as “will,” “would,” “should,” “could” or “may.” Farmers’ actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Factors that could cause Farmers’ actual results to differ materially from those described in the forward-looking statements include impacts from COVID-19 on local, national and global economic conditions; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; unexpected changes in interest rates or disruptions in the mortgage markets related to COVID-19 or other responses to the health crisis; and the other factors contained in Farmers’ Annual Report on Form 10-K for the year ended December 31, 2019, and subsequent Quarterly Reports on Form 10-Q, filed with the Securities and Exchange Commission (SEC) and available on Farmers’ website (www.farmersbankgroup.com) and on the SEC’s website (www.sec.gov). Forward-looking statements are not guarantees of future performance and should not be relied upon as representing management’s views as of any subsequent date. Farmers does not undertake any obligation to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

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