Farmers National Banc Corp FMNB Form 10-Q filing Q3 FY2024

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

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Total assets $5,236,503 $4,971,163 $5,236,503 $4,971,163 Net income $8,535 $13,314 $31,558 $35,356 Diluted earnings per share $0.23 $0.36 $0.84 $0.94 Return on average assets (annualized) 0.66% 1.06% 0.83% 0.93% Return on average equity (annualized) 8.18% 14.49% 10.51% 12.79% Net loans to assets 61.96% 63.04% 61.96% 63.04% Loans to deposits 75.21% 70.23% 75.21% 70.23%

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.

Net income for the nine months ended September 30, 2024 was $31.6 million, or $0.84 per diluted share, compared to $35.4 million, or $0.94 per diluted share, for the nine months ended September 30, 2023. The decrease in net income was due to a decline in net interest income partially offset by lower noninterest expense.

Net Interest Income. The following schedule details the various components of net interest income for the periods indicated. All asset yields are calculated on a tax-equivalent basis where applicable. Security yields are based on amortized cost.

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Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

(1)

Rates are calculated on an annualized basis.

(2)

Interest on certain tax-exempt loans and tax-exempt securities in 2024 and 2023 is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21%

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Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

(1)

Rates are calculated on an annualized basis.

(2)

Interest on certain tax-exempt loans and tax-exempt securities in 2024 and 2023 is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21%

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.

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.

Net interest income for the nine month period ended September 30, 2024, was $95.6 million compared to $105.0 million for the same period in 2023. The decrease in net interest income was driven by the same factors as discussed above. The net interest margin was 2.69% for the nine month period ended September 30, 2024 compared to 2.95% for the same period in 2023. The decline in net interest margin for the nine month period ended September 30, 2024, was also driven by the same factors discussed previously.

Provision for Credit Losses and Provision for Unfunded Loans. The provision for credit losses and unfunded commitments totaled $7.0 million for the three months ended September 30, 2024, compared to $243,000 for the three months ended September 30, 2023. The increased provision for credit losses was primarily due to the increased level of net charge-offs and reserving activity resulting from the

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deterioration in a single commercial real estate credit backed by office space. Strong loan growth during the quarter also increased provision costs during the quarter.

For the first nine months of 2024, the Company recorded a provision for credit losses and unfunded loans of $7.7 million compared to $8.9 million for the same period in 2023. Included in the $8.9 million figure in 2023 was a Day 1 provision for credit losses and provision for unfunded loans under the current expected credit loss model (“CECL”) of $7.7 million related to the acquisition of Emlenton. There was no Day 1 provision recorded in 2024.

Noninterest Income. Noninterest income for the third quarter of 2024 was of $12.3 million compared to $9.8 million for the third quarter of 2023. This increase was due to solid growth in the Company’s fee based business lines along with gains from SBIC funds and a $444 thousand gain on the purchase of $3 million of the Company’s subordinated debt.

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.

For the nine months ended September 30, 2024, noninterest income increased by $597 thousand compared to the nine months ended September 30, 2023. The increase was primarily due to growth in service charges and the Company's fee based businesses offset by security losses of $2.6 million in the first nine months of 2024 compared to security losses of $490 thousand for the first nine months of 2023.

Service charges on deposit accounts increased by $775 thousand in the first nine months of 2024 compared to the same period in 2023 due to the fee increases discussed above. Bank owned life insurance income increased to $2.0 million for the nine months ended September 30, 2024 compared to $1.8 million for the nine months ended September 30, 2023 as crediting rates on the insurance policies continue to increase. Trust fees increased to $7.4 million in the first nine months of 2024 from $6.7 million in the first nine months of 2023 due to continued strong growth in this line of business. Insurance agency commissions were $4.2 million for the first nine months of 2024 compared to $3.9 million for the same period in 2023. Strong annuity sales in 2024 drove the increase. Other mortgage banking fee income declined to $150 thousand for the nine months ended September 30, 2024 compared to $571 thousand for the same time in 2023. The decline was primarily due to the impairment charge discussed above. Other noninterest income increased to $3.9 million in the first nine months of 2024 from $2.9 million in the first nine months of 2023. The Company recorded $897 thousand more in SBIC income in the first nine months of 2024 compared to the same period in 2023.

Noninterest Expense. Noninterest expense totaled $27.1 million for the quarter ended September 30, 2024 compared to $27.7 million for the quarter ended September 30, 2023. The third quarter of 2023 included $268 thousand of merger related charges. There were no merger related expenses during the third quarter of 2024. Salaries and employee benefits were $14.9 million in the third quarter of 2024 compared to $14.2 million in the third quarter of 2023. The increase was primarily driven by higher salaries associated with employee raises along with higher health care expenses. FDIC and state and local taxes decreased by $168 thousand to $1.5 million for the third quarter of 2024 compared to $1.6 million for the third quarter of 2023 due to lower FDIC premiums. Intangible amortization declined to $629 thousand in the third quarter of 2024 from $725 thousand for the third quarter of 2023. This decrease was driven by amortization from a prior acquisition running off. Other noninterest expense decreased $804 thousand in the third quarter of 2024 to $3.4 million from $4.2 million in the third quarter of 2023. The primary reason for the decrease was due to a $785 thousand charge incurred in 2023 for the settlement of a lawsuit.

For the nine months ended September 30, 2024, noninterest expense decreased to $80.5 million from $84.8 million for the nine months ended September 30, 2023. In 2023, the Company incurred $5.0 million of merger related costs while no merger costs were incurred in

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2024. Salaries and employee benefits increased to $44.5 million in the first nine months of 2024 compared to $42.5 million in the first nine months of 2023. The increase was primarily driven by salary increases associated with employee raises along with increased healthcare costs. FDIC and state and local taxes decreased $355 thousand to $4.0 million for the first nine months of 2024 compared to $4.4 million for the first nine months of 2023 due to improvements in the Bank's FDIC assessment variables. Professional fees increased $185 thousand for the nine months ended September 30, 2024, compared to the first nine months of 2023 primarily due to increased legal fees. Intangible amortization declined $909 thousand in the first nine months of 2024 to $1.9 million compared to $2.9 million for the first nine months of 2023. This decrease was driven by accelerated amortization that occurred in 2023 that did not reoccur in 2024 and amortization from a prior acquisition running off.

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.

Income tax expense increased from $5.6 million for the nine months ended September 30, 2023 to $6.2 million for the nine months ended September 30, 2024. The increase in tax expense was primarily due to the Company dissolving Farmers National Captive, Inc. in November of 2023 so the Company is no longer receiving the tax benefits associated with this business.

Financial Condition

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.

Securities. Securities available-for-sale decreased to $1.29 billion at September 30, 2024, from $1.30 billion at December 31, 2023. Gross unrealized losses on the portfolio totaled $195.0 million at September 30, 2024, compared to gross unrealized losses of $222.6 million at December 31, 2023. In addition to the changes in the gross unrealized loss on the securities, the Company has also received $91.2 million in proceeds from the sale, maturity and repayments on securities during the first nine months of 2024. This has been partially offset by purchases totaling $60.3 million through the first nine months of 2024.

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.

The following tables present the amortized cost basis of the Company's commercial real estate portfolio segment by industry as of September 30, 2024 and December 31, 2023:

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Allowance for Credit Losses. The following table indicates key asset quality ratios that management evaluates on an ongoing basis. The recorded investment balances were used in the calculations.

Asset Quality History

(In Thousands of Dollars)

ASU 2022-02 was adopted on January 1, 2023 and such, non-performing loans balances include prior period TDRs and subsequent to January 1, 2023, loans with modifications to borrowers with financial difficulty are included in non-performing loans.

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.

Based on the evaluation of the adequacy of the allowance for credit losses, management believes that the allowance for credit losses at September 30, 2024 is adequate. The provision for credit losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio. Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past

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due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

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.

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.

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.

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.

Federal bank regulatory agencies finalized a rule that simplifies capital requirements for community banks by allowing them to adopt a simple leverage ratio to measure capital adequacy. The community bank leverage ratio framework removes requirements for calculating and reporting risk-based capital ratios for a qualifying community bank that opts into the framework. The Company has not elected to adopt this framework.

Critical Accounting Policies

The Company follows financial accounting and reporting policies that are in accordance with U.S. GAAP. These policies are presented in Note 1 of the consolidated audited financial statements in the Company’s Annual Report to Shareholders included in the Company’s 2023 Form 10-K. Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified two accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the Company’s financial statements. These policies relate to determining the adequacy of the allowance for credit losses and if there is any impairment of goodwill or other intangible. Additional information regarding these policies is included in the notes to the aforementioned 2023 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

Farmers maintains an allowance for credit losses. The allowance for credit losses is presented as a reserve against loans on the balance sheets. Credit losses are charged off against the allowance for credit losses, while recoveries of amounts previously charged off are credited to the allowance for credit losses. A provision for credit losses is charged to operations based on management’s periodic evaluation of adequacy of the allowance.

The Company’s allowance for credit losses represents management’s estimate of expected credit losses over the remaining expected life of the Company’s financial assets measured at amortized cost and certain off-balance sheet lending-related commitments.

The allowance for credit losses involves significant judgment on a number of matters including the weighting of macroeconomic forecasts and microeconomic statistics, incorporation of historical loss experience, assessment of risk characteristics, assignment of risk ratings, valuation of collateral, and the determination of remaining expected life. Refer to Note 4 for further information on these judgments as well as the Company’s policies and methodologies used to determine the Company’s allowance for credit losses.

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A significant judgment involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the four-quarter forecast period within the Company’s methodology. The four-quarter forecast incorporates three macroeconomic variables (“MEV”) that are relevant for exposures across the Company.

• U.S. changes in real gross domestic product (GDP).
• U.S. personal consumption expenditures (PCE) inflation.
• U.S. civilian unemployment rate.

Changes in the Company’s assumptions and forecasts of economic conditions could significantly affect its estimate of expected credit losses in the portfolio at the balance sheet date or lead to significant changes in the estimate from one reporting period to the next.

It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for credit losses because management considers a wide variety of factors and inputs in estimating the allowance for credit losses. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor or input may offset deterioration in others.

To consider the impact of a hypothetical alternate macroeconomic forecast, the Company compared the modeled credit losses determined using its central and relative adverse macroeconomic scenarios. The central and relative adverse scenarios each included the three MEVs, but differed in the levels, paths and peaks/troughs of those variables over the four-quarter forecast period.

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:

• The impacts of changes in the MEVs are both interrelated and nonlinear, so the results of this analysis cannot be simply extrapolated for more severe changes in macroeconomic variables.
• Expectations of future changes in portfolio composition and borrower behavior can significantly affect the allowance for credit losses.

To demonstrate the sensitivity of credit loss estimates to macroeconomic forecasts as of September 30, 2024, the Company compared the modeled estimates under its relative adverse scenario for two of the Company’s largest loan pools to its central scenario for the same loan pools. Without considering offsetting or correlated effects in other qualitative components of the Company’s allowance for credit losses, the comparison between these two scenarios for the exposures below reflect the following differences:

• An increase of approximately $650 thousand for residential real estate loans and lending-related commitments
• An increase of approximately $1.14 million for commercial real estate non-owner occupied loans and lending-related commitments

This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall allowance for credit losses as it does not reflect any potential changes in the other adjustments to the quantitative calculation, which would also be influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these modeled lifetime loss estimates based on then-current circumstances and conditions.

Recognizing that forecasts of macroeconomic conditions are inherently uncertain, the Company believes that its process to consider the available information and associated risks and uncertainties is appropriately governed and that its estimates of expected credit losses were reasonable and appropriate for the period ended September 30, 2024.

The Company uses two methodologies to analyze loan pools. The cohort method and the PD/LGD. Cohort relies on the creation of cohorts to capture loans that qualify for a particular segment, as of a point in time. Those loans are then tracked over their remaining lives to determine their loss experience. The Company aggregates financial assets on the basis of similar risk characteristics when evaluating loans on a collective basis. Those characteristics include, but are not limited to, internal or external credit score, risk ratings, financial asset, loan type, collateral type, size, effective interest rate, term, or geographical location. The Company uses cohort primarily for consumer loan portfolios.

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The PD portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, or is partially or wholly charged-off. Typically, a one-year time period is used to assess PD. PD can be measured and applied using various risk criteria. Risk rating is one common way to apply PDs. LGD is to determine the percentage of loss by facility or collateral type. LGD estimates can sometimes be driven, or influenced, by product type, industry or geography. The Company uses PD/LGD primarily for commercial loan portfolios.

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.

Liquidity

The Company maintains, in the opinion of management, liquidity sufficient to satisfy depositors’ requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company’s ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition. The Company’s objective in liquidity management is to maintain the ability to meet loan commitments, purchase securities or to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings. Principal sources of liquidity for the Company include assets considered relatively liquid, such as federal funds sold, cash-due from banks, as well as cash flows from maturities and repayments of loans, and to a lesser extent securities.

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.

Off-Balance Sheet Arrangements

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.

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Recent Market and Regulatory Developments

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced in the U.S. Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system.

Also, such statutes, regulations and policies are continually under review by Congress, state legislatures and federal and state regulatory agencies and are subject to change at any time, particularly in the current economic and regulatory environment. Any such change in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business of the Company.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Important considerations in asset/liability management are liquidity, the balance between interest rate sensitive assets and liabilities and the adequacy of capital. Interest rate sensitive assets and liabilities are those which have rates subject to change within a future time period due to maturity of the instrument or changes in market rates. While liquidity management involves meeting the funds flow requirements of the Company, the management of interest rate sensitivity focuses on the structure of these assets and liabilities with respect to maturity and repricing characteristics. Managing interest rate sensitive assets and liabilities provides a means of tempering fluctuating interest rates and maintaining net interest margins through periods of changing interest rates. The Company monitors interest rate sensitive assets and liabilities to determine the overall interest rate position over various time frames.

The Company considers the primary market exposure to be interest rate risk. Simulation analysis is used to monitor the Company’s exposure to changes in interest rates, and the effect of the change to net interest income. The following table shows the effect on net interest income and the net present value of equity from a sudden and sustained 400 basis point increase to a 400 basis point decrease in market interest rates. The assumptions and predictions include inputs to compute baseline net interest income, expected changes in rates on interest bearing deposit accounts and loans, competition and various other factors that are difficult to accurately predict.

The yield curve has changed dramatically over the past two years. In an intense effort to diffuse inflation, the Federal Open Market Committee raised the discount rate 5.25% from March 2022 to July 2023, the fastest pace on record. The committee then held the discount rate at 5.5% until September 2024 when they cut the discount rate by 50 basis points, and set the rate at 5.0% in an attempt to guide the economy into a “soft landing”, where the still comparatively elevated rate of 5.0% will continue to bring down inflation without harming the job market or the economy.

The above table presents results in the up rate scenarios that exceed internal policy limits for the Economic Value of Equity (“EVE”) for both the current quarter end as well as the last year end. This unprecedented outcome was created by the events occurring over the past two years, namely, the massive influx of liquidity in the form of deposits in 2020 and 2021 from government assistance while interest rates were at their lowest; the deployment of those funds at those low rates; and now the usage of those deposits as consumers

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utilize their deposits to maintain living standards in this highly inflationary economy, which prevents the Company from investing in the higher rates now available. With the EVE model moving rates even higher, it further exacerbates the differential between market rates and book rates, thereby creating the out of internal policy consequence. To mitigate these results, the Company has prioritized employing strategies to shrink the longer duration investment portfolio and replace the balances with assets having a shorter duration, including loans, in an effort to close the gap between the book and market rates. Any growth in lending will be done in a measured manner given the uncertain economic backdrop that exists today. The Company recognizes the risk inherent in growing loans but feels that its historical record of prudent underwriting, its low loan to deposit ratio and its strong credit metrics provide the ability to pursue solid opportunities in the marketplace. In addition, any loan growth will be broad based encompassing consumer, indirect, 1-4 family, commercial and industrial and CRE so as not to increase risk in any one portfolio or sector.

The remaining results of the simulations in the table above indicate that interest rate change results fall within internal limits established by the Company at both September 30, 2024, and December 31, 2023. A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis. The Company has no market risk sensitive instruments held for trading purposes.

With the largest amount of interest sensitive assets and liabilities maturing within twelve months, the Company monitors this area most closely. Early withdrawal of deposits, prepayments of loans and loan delinquencies are some of the factors that can impact actual results in comparison to our simulation analysis. In addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change in net interest margin.

Interest rate sensitivity management provides some degree of protection against net interest income volatility. It is not possible or necessarily desirable to attempt to eliminate this risk completely by matching interest sensitive assets and liabilities. Other factors, such as market demand, interest rate outlook, regulatory restraint and strategic planning also have an effect on the desired balance sheet structure.

Item 4. Controls and Procedures

Based on their evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that occurred during the fiscal quarter ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a defendant in lawsuits and other adversary proceedings arising in the ordinary course of business. Legal costs incurred in connection with the resolution of claims and lawsuits are generally expensed as incurred, although the Company establishes accruals where losses are deemed probable and reasonably estimable. The Company’s assessment of the current exposure with respect to adverse claims in legal matters could change in the event of the discovery of additional facts in such matters or upon determinations by judges, juries, administrative agencies or other finders of fact that are inconsistent with the Company’s evaluation of claims. It is possible that the ultimate resolution of matters, if unfavorable, may be material to the results of operations in a particular future period as the time and amount of any resolution of such actions and its relationship to the future results of operations are not known.

Item 1A. Risk Factors

The Company is exposed to risk when other financial institutions experience financial difficulties which could have an adverse impact on the banking industry environment in which the Company operates. The collapses of Silicon Valley Bank, Signature Bank and First Republic Bank have caused uncertainty in the investor community and banking customers. While the Company does not believe that the circumstances of these three bank failures are indicators of broader issues within the banking system, the failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the financial services industry, including the Company. The Company will continue to monitor the ongoing events concerning these three banks as well as any future potential bank failures and volatility within the financial services industry generally, together with any responsive measures taken by the banking regulators to mitigate or manage potential turmoil in the financial services industry.

For further discussion of risk factors related to the Company, refer to Part 1, Item 1A, “Risk Factors,” contained in the Company’s 2023 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition.

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Additional risk factors not currently known to us or that we currently deem immaterial may also adversely affect us. There have been no material changes to the risk factors previously disclosed in our 2023 Form 10K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

On March 1, 2023, the Company announced that its Board of Directors authorized the purchase of up to 1,000,000 shares of its common stock in the open market or in privately negotiated transactions, from time to time and subject to market and other conditions. This 2023 Repurchase Program supersedes the Company's 2019 share repurchase program. The 2023 Repurchase Program may be modified, suspended or terminated by the Company at any time.

There was no treasury stock activity under the program during the three month period ended June 30, 2024.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Securities Trading Plans of Directors and Executive Officers

During the three months ended September 30, 2024, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any “non-Rule 10b5-1 trading arrangement” (as defined in Item 408(c) of Regulation S-K).

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Item 6. Exhibits

The following exhibits are filed or incorporated by reference as part of this report:

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3.1 Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the Commission on October 3, 2001). 3.2 Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on May 1, 2013). 3.3 Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 20, 2018). 3.4 Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2020). 10.1** Farmers National Banc Corp. Third Amended and Restated Executive Separation Policy, as amended (filed herewith). 31.1 Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of the Company (principal executive officer) (filed herewith). 31.2 Rule 13a-14(a)/15d-14(a) Certification of A. Troy Adair, Executive Vice President, Chief Financial Officer and Secretary of the Company (principal financial officer) (filed herewith). 32.1 Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive Officer of the Company (principal executive officer) (filed herewith). 32.2 Certification pursuant to 18 U.S.C. Section 1350 of A. Troy Adair, Executive Vice President, Chief Financial Officer and Secretary of the Company (principal financial officer) (filed herewith). (101) The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows; and (vi) Notes to Unaudited Consolidated Financial Statements. (104) The cover page from the Company’s Quarterly report on Form 10-Q for the quarter ended September 30, 2024, has been formatted in Inline XBRL.

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