Executive Summary / Key Takeaways

• Farmers National Banc (FMNB) delivered a strong start to 2025, reporting net income of $13.6 million, a significant increase from $11.2 million in the prior year quarter, driven by robust net interest income growth and expanding fee-based revenues.
• Net interest margin expanded by 15 basis points year-over-year, benefiting from a favorable shift in asset yields and a decrease in funding costs, partially influenced by recent Federal Reserve rate adjustments.
• Noninterest income saw substantial growth, increasing by over $2 million, fueled by broad-based strength across fee-generating businesses including trust, insurance, retirement consulting (boosted by the Crest Retirement acquisition), and deposit services.
• The company actively managed its balance sheet, increasing liquidity through significant deposit growth (including brokered deposits) and strategically reducing short-term borrowings, while also restructuring a portion of its securities portfolio to enhance future yields.
• Despite facing competitive pressures, particularly regarding digital infrastructure compared to larger peers, FMNB maintains a solid financial position with strong capital ratios and improving asset quality metrics, supporting its dividend payout and measured growth strategy.

A Regional Powerhouse Adapting to Market Shifts

Farmers National Banc Corp., rooted in its 1887 founding in Canfield, Ohio, has evolved from a traditional community bank into a diversified financial services holding company. Through a history marked by strategic acquisitions, including National Bancshares, Maple Leaf, and Cortland Bancorp, FMNB has expanded its footprint across northeastern Ohio and western Pennsylvania and broadened its service offerings to include trust, retirement consulting, insurance, and investment services alongside core banking operations. This strategic evolution positions FMNB not merely as a lender and deposit-taker, but as a comprehensive financial partner for its regional clientele.

Operating primarily through its Bank and Trust segments, FMNB's strategy centers on leveraging its deep local relationships and diversified business lines to generate stable revenue streams. The Bank segment, encompassing traditional banking, insurance, and investments, remains the largest contributor to revenue and profit. For the first quarter of 2025, the Bank segment reported total revenues of $56.2 million and segment profit of $18.6 million, reflecting growth from the prior year. The Trust segment, focused on specialized trust and retirement consulting services, demonstrated strong growth momentum, with total revenues reaching $3.4 million and segment profit of $2.0 million in Q1 2025, benefiting significantly from recent strategic moves like the acquisition of Crest Retirement Advisors.

In the competitive landscape, FMNB operates alongside a mix of community banks and larger regional and national institutions. While FMNB benefits from strong local brand loyalty and a diversified service bundle that includes unique offerings like regulatory expertise in municipal investments, it faces challenges from competitors with greater scale and more advanced technological infrastructure. Larger regional players like Regions Financial (RF) and BOK Financial (BOKF) demonstrate higher operating efficiencies and faster digital processing capabilities, posing a threat to FMNB's market share, particularly in digitally-savvy segments. For instance, some peers boast significantly faster transaction processing and loan approval times enabled by more substantial investments in technology. Unlike some competitors who highlight proprietary technological moats or significant R&D into new platforms, FMNB's operational details point to reliance on core processing systems and a need to address digital infrastructure gaps, which could result in higher operating costs per unit compared to more technologically advanced rivals. FMNB's strategic response involves capitalizing on its community-focused approach and integrated service model to build deeper customer relationships, aiming to offset technological disadvantages through personalized service and cross-selling opportunities.

Financial Performance: A Quarter of Expanding Margins and Fee Income

Farmers National Banc delivered a solid financial performance in the first quarter of 2025, reporting net income of $13.6 million, or $0.36 per diluted share. This represents a notable increase from the $11.2 million, or $0.30 per diluted share, earned in the first quarter of 2024. The improvement was primarily driven by a significant increase in net interest income and robust growth in noninterest income, despite incurring $1.3 million in pretax losses on the sale of investment securities and other assets during the quarter.

Net interest income rose to $34.2 million for the three months ended March 31, 2025, up from $31.7 million in the same period of 2024. This 8% increase was largely attributable to a 15 basis point expansion in the net interest margin, which reached 2.85% in Q1 2025 compared to 2.70% in Q1 2024. The margin improvement stemmed from a 9 basis point increase in interest-earning asset yields and a 9 basis point decrease in the cost of interest-bearing liabilities. The decline in funding costs was a direct consequence of the Federal Reserve's rate reductions in the fourth quarter of 2024, which led to lower deposit costs for the bank.

Noninterest income proved to be a significant growth engine, increasing by over $2 million to $10.5 million in the first quarter of 2025, compared to $8.4 million in the prior year period. This growth was broad-based across FMNB's diversified fee-generating businesses. Service charges on deposit accounts increased to $1.8 million, benefiting from fee increases implemented in the second quarter of 2024. Bank owned life insurance income rose to $810 thousand, reflecting additional policy purchases and higher crediting rates. Trust fees grew to $2.6 million, driven by continued business unit expansion. Insurance agency commissions increased to $1.7 million, primarily due to growth in fixed annuity sales. Retirement plan consulting fees saw a substantial jump to $798 thousand, a direct result of the acquisition of Crest Retirement Advisors in late 2024. Gains on the sale of loans also increased to $326 thousand due to greater saleable volume, and debit card income grew to $1.9 million from better volumes.

Noninterest expenses totaled $28.5 million in Q1 2025, up from $27.0 million in Q1 2024. The increase was mainly driven by higher salaries and employee benefits ($16.2 million vs. $15.1 million), reflecting employee raises, the impact of the Crest Retirement acquisition, and higher commission expenses tied to increased fee revenues. Occupancy and equipment expense also rose to $4.1 million from $3.7 million, partly due to increased maintenance costs from more severe winter weather. Core processing charges increased by $262 thousand. These increases were partially mitigated by the company's ongoing cost-saving initiatives.

The provision for credit losses and unfunded commitments resulted in a benefit of $204 thousand in Q1 2025, compared to a benefit of $449 thousand in Q1 2024. This benefit was primarily related to slightly lower loan balances in 2025 and favorable changes in loss factors used in the allowance calculation.

Balance Sheet Management and Asset Quality

FMNB's balance sheet reflects active management in response to the prevailing interest rate and liquidity environment. Total assets stood at $5.16 billion at March 31, 2025, a slight increase from $5.12 billion at December 31, 2024.

Net loans, excluding loans held for sale, decreased slightly to $3.25 billion at March 31, 2025, from $3.27 billion at the end of 2024. This modest decline was primarily seen in commercial and construction loan categories. The loan portfolio remains diversified across commercial real estate, commercial, residential real estate, and consumer segments. Asset quality metrics showed some improvement, with nonperforming loans decreasing to $20.7 million, or 0.64% of total loans, at March 31, 2025, down from $22.8 million, or 0.70%, at December 31, 2024. Loans delinquent 30-89 days also decreased. The allowance for credit losses (ACL) decreased slightly to $35.5 million, or 1.09% of total loans, from $35.9 million, or 1.10%, at the end of 2024. This decrease was attributed to lower loan balances and adjustments to qualitative factors in the ACL model, partially offset by an increase in specific reserves for a commercial real estate loan. Net charge-offs for the quarter were $336 thousand, representing an annualized rate of 0.04% of average net loans outstanding.

The ACL estimation process involves significant judgment, incorporating historical loss experience, current conditions, and reasonable forecasts of macroeconomic variables like U.S. real GDP, PCE inflation, and unemployment. Sensitivity analysis indicates that under a hypothetical relative adverse macroeconomic scenario, modeled credit losses could increase by approximately $657 thousand for residential real estate loans and $1.15 million for commercial real estate non-owner occupied loans, highlighting the sensitivity of the ACL to economic forecasts.

Liquidity saw a notable increase, with cash and cash equivalents rising by $27.5 million to $113.3 million at March 31, 2025, as the company intentionally held more cash. Total deposits grew significantly to $4.48 billion from $4.27 billion, driven by growth in interest-bearing deposits (including $85 million in acquired brokered time deposits) as customers sought higher yields. This strong deposit growth allowed FMNB to substantially reduce short-term borrowings, which fell from $305 million to $102 million. The bank also maintains significant additional borrowing capacity at the FHLB, totaling approximately $749.3 million.

Total stockholders' equity increased to $429.1 million at March 31, 2025, from $406.0 million at December 31, 2024. This was primarily due to a $16.0 million decrease in accumulated other comprehensive loss (related to unrealized losses on available-for-sale securities) and retained earnings growth of $7.2 million from quarterly net income, partially offset by dividends paid. FMNB maintains capital ratios well above regulatory minimums, with a Common Equity Tier 1 ratio of 11.44%, Total Risk-Based Capital ratio of 14.87%, Tier 1 Risk-Based Capital ratio of 11.92%, and Tier 1 Leverage ratio of 8.52% at March 31, 2025, classifying the bank as well capitalized.

FMNB actively manages its securities portfolio. In Q1 2025, the company restructured $23.9 million of available-for-sale securities, reinvesting the proceeds into higher-yielding assets, with an estimated earn-back period of 2.2 years on the realized loss. Net unrealized losses on the portfolio decreased to $223.7 million from $244.1 million at year-end 2024.

Outlook and Key Risks

Looking ahead, FMNB anticipates continued volatility in the bond market throughout 2025. The company is committed to fulfilling existing unfunded commitments, including those related to qualified affordable housing projects (expected through 2038) and solar investment tax credits (expected to be fully funded in 2025). While management did not provide specific quantitative financial guidance in the recent filing, external analysis suggests a positive earnings outlook, with one Seeking Alpha author projecting a 17% increase in EPS to $1.43 for 2025.

However, the company operates in an environment subject to several key risks. Macroeconomic conditions, including potential shifts in U.S. economic policies, trade restrictions, and the risk of recession, could impact credit quality and loan demand. Changes in Federal Reserve policy and interest rates remain a significant factor. The rapid shifts in the yield curve over recent years have created a mismatch between market rates and the book rates on assets acquired during periods of lower rates, leading to the bank's Economic Value of Equity exceeding internal policy limits in hypothetical up-rate scenarios. FMNB is actively mitigating this by prioritizing shorter-duration assets and pursuing measured loan growth. Competition from regional and national banks, as well as fintech and credit unions, particularly regarding technological capabilities and pricing pressures, continues to pose a challenge. Regulatory changes and the ability to attract and retain skilled employees are also ongoing considerations.

Conclusion

Farmers National Banc Corp. demonstrated a strong start to 2025, marked by significant earnings growth driven by expanding net interest margins and robust performance across its diversified fee-based businesses. The company's strategic focus on leveraging its local market presence, expanding its service offerings through targeted acquisitions, and actively managing its balance sheet has positioned it to generate solid results even amidst a challenging and uncertain economic backdrop.

While FMNB faces competitive disadvantages in terms of scale and digital infrastructure compared to some larger peers, its established brand loyalty, diversified income streams, prudent underwriting practices, and strong capital position provide a foundation of resilience. The successful execution of balance sheet strategies, such as the securities restructuring and liquidity build-up, alongside continued growth in fee income, are positive indicators for future performance. Investors should monitor the company's ability to manage interest rate risk, navigate the competitive landscape (particularly regarding technological adoption), and maintain asset quality in response to evolving macroeconomic conditions. Overall, FMNB presents a picture of a regional bank effectively utilizing its core strengths and strategic initiatives to deliver profitable growth and maintain financial stability.