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 Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by FMNB's solid management team with extensive market knowledge, which has been instrumental in the execution of the company’s strategy and structuring of balance sheet growth through a series of acquisitions. Overall, with the liability-sensitivity, FMNB is well-positioned to drive profitability momentum with immediate repricing benefits expanding NIM and securities book runoff invested into higher yielding earning assets supporting ROA trending higher to the 1.00% range. FMNB’s spread revenue is complemented by a solid, durable, and diversified revenue stream of noninterest income of 24% (noninterest income to operating revenue), which is largely attributable to trust and wealth management and continues to generate consecutive solid growth. KBRA views FMNB’s AUC of $3.7 billion in wealth management to be meaningful for the size of the company. FMNB’s asset quality has historically tracked better than peer levels, reflecting lower levels of NPAs and NCOs with related ratios of 0.40% and 0.10%, respectively. Despite a slight uptick in delinquency rate and management’s expectations for some credit normalization, FMNB has a conservative underwriting culture. Outside of the office portfolio (6% of total loans) with two problem credits in the Pittsburgh market related to the Emclaire Financial Corp. acquisition, credit quality remains solid. Historically, FMNB has managed capital conservatively as evidenced by a CET1 ratio that tracked above 13%, 150 to 290 bps above rated peers. However, capital levels have more recently trended lower, including a CET1 ratio of 10.9%, 40 bps below the 11.3% peer average and a TCE ratio at 4.2% vs 8.0% peer average, negatively impacted by acquisitions, diminished profitability, and AOCI impact. KBRA expects FMNB to rebuild capital to levels more consistent with peers given balance sheet flexibility and improved profitability trends and reduced impact from AOCI as rates decline and investment securities runoff.

Rating Sensitivities

While a rating upgrade is unlikely in the intermediate term, improvement in earnings capacity over time with well-contained credit costs and capital levels trending well above rated peers and consistent with the company's historical track record would be viewed favorably. Credit deterioration beyond expectations relative to peers which materially impact regulatory capital levels could result in rating pressure.

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