KBRA Affirms Ratings for Farmers National Banc Corp.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Canfield, Ohio-based Farmers National Banc Corp. (NASDAQ: FMNB or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its subsidiary, The Farmers National Bank of Canfield (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by a solid management team with extensive market knowledge, which has been instrumental in realizing the company’s strategy and structuring of recent acquisitions. The company has sound risk adjusted earnings, which benefit from a NIM that compares well to peers, driven by a low cost of interest bearing liabilities (1.55% during 2Q23). FMNB has a strong deposit franchise with minimal dependence on wholesale funding, representing less than 10% of total funding as of 2Q23. The company’s relatively low-cost deposit franchise includes ~30% noninterest bearing accounts as of 2Q23. Additionally, FMNB reflects uninsured deposits balances representing approximately 15% of total deposits after adjusting for collateralized deposits and internal accounts. Risk weighted density and balance sheet leverage is conservatively managed historically at near 70%, resulting in solid risk-adjusted returns. Additionally, revenue diversification is viewed positively as FMNB has consistently generated stable fee income from its deposit fees, trust and insurance revenues. Altogether, fee income levels are similar to peer averages, which have typically accounted for 15% - 20% of revenues and are expected to benefit from opportunities to cross sell since the Emclaire Financial Corp. acquisition (Closed in 1Q23), adding nearly $1.1 billion in assets. Solid improvement in efficiency is expected in the medium term, as the company expects to realize 35% in cost saves from the acquisition by the end of 2023, similar to previous M&A related cost savings. The company’s historical credit performance has been sound with the NCO ratio peaking at 15 bps in 2016, which is supported by management’s knowledge of local markets, as well as conservative underwriting practices. Classified and criticized loan balances have slightly increased, representing ~5% of total loans as of 2Q23, compared to 3.1% at YE22. Overall, NCO activity and NPA formation has been minimal, and the company expects similar asset quality performance during 2H23, given lower borrower LTVs. Overall, KBRA views capital ratios as below peer averages, yet expects capital to rebuild over the shorter term supported by the company’s solid earnings profile and anticipated limited balance sheet growth. The TCE ratio is negatively impacted by AOCI adjustments as the average duration of the securities portfolio exceeds 7 years.

Rating Sensitivities

Positive rating momentum is not expected over the medium term. Continued deterioration within the classified and criticized loan balances resulting in material losses, additional capital deterioration (CET1 ratio falling below 10%), or a higher reliance on wholesale borrowing adversely impacting earnings could result in negative rating action.

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