Farmers National Banc Corp. Announces 2018 Fourth Quarter Financial Results

Farmers National Banc Corp. (Farmers) (NASDAQ: FMNB) today reported financial results for the three months and year ended December 31, 2018.

Net income for the three months ended December 31, 2018 was $8.7 million, or $0.31 per diluted share, which compares to $5.2 million, or $0.19 per diluted share, for the three months ended December 31, 2017 and $8.1 million, or $0.29 per diluted share, for the linked quarter. Annualized return on average assets and return on average equity were 1.50% and 13.65%, respectively, for the three month period ending December 31, 2018, compared to 0.96% and 8.60% for the same three month period in 2017, and 1.42% and 12.80% for the linked quarter. Farmers’ return on average tangible equity (Non-GAAP) was 16.68% for the quarter ended December 31, 2018 compared to 10.69% for the same quarter in 2017 and 15.70% for the linked quarter.

Net income for the twelve months ended December 31, 2018 was $32.6 million, or $1.16 per diluted share, compared to $22.7 million or $0.82 per diluted share for the same twelve month period in 2017. Return on average assets and return on average equity were 1.46% and 13.13%, respectively, for the twelve months ended December 31, 2018, compared to 1.09% and 9.92% for the same period in 2017. Farmers’ return on average tangible equity (Non-GAAP) was 16.02% for the twelve month period ended December 31, 2018 compared to 12.36% for the same period in 2017.

On December 22, 2017, H.R.1, known as the "Tax Cuts and Jobs Act,” was signed into law. H.R.1, among other things, reduced the corporate income tax rate to 21% effective January 1, 2018. As a result of passage of the new tax law, Farmers effective tax rate decreased from 31.5% for the twelve months ended December 31, 2017 to 14.9% for the twelve months ended December 31, 2018. With the enactment of the new tax law, Farmers was required to remeasure its net deferred tax asset to the current enacted statutory tax rate. The remeasurement of the net deferred tax asset in the fourth quarter of 2017 reduced the net deferred tax asset and increased federal income tax expense by approximately $1.8 million. This represented an impact on earnings per share of approximately $0.06 per diluted share for that fourth quarter, based on that quarter’s weighted average diluted shares outstanding of approximately 28 million.

Kevin J. Helmick, President and CEO, stated, "We are pleased to report record net income for the quarter and for all of 2018. This is a result of the successful execution of our strategic plan, including the integration of several acquisitions over the previous 3 years. Our performance was a result of many positive factors, including continued strong loan growth and strong growth in non-interest income, low levels of credit costs and well controlled non-interest expenses.”

2018 Fourth Quarter Financial Highlights

• Loan growth
  Total loans were $1.74 billion at December 31, 2018, compared to $1.58 billion at December 31, 2017, representing an increase of 10.1%. The increase in loans is 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 commercial and commercial real estate, residential real estate and agricultural loan portfolios. Loans now comprise 79.4% of the Bank's average earning assets for the quarter ended December 31, 2018, an improvement compared to 77.9% for the same period in 2017. This improvement, along with the interest rate environment, has resulted in a 16.4% increase in loan income in the fourth quarter of 2018 compared to the same quarter in 2017.

• Loan quality
  Non-performing assets to total assets remain at a low level, currently at 0.33%. Early stage delinquencies also continue to remain at low levels, at $8.9 million, or 0.51% of total loans, at December 31, 2018. Net charge-offs for the current quarter were $310 thousand, compared to $189 thousand in the same quarter in 2017 and annualized net charge-offs as a percentage of average net loans outstanding is only 0.07% for the quarter ended December 31, 2018. Lending to the energy sector is insignificant and less than 1% of the loan portfolio.

• Net interest margin
  The net interest margin for the three months ended December 31, 2018 was 3.80%, an 18 basis points decrease from the quarter ended December 31, 2017. In comparing the fourth quarter of 2018 to the same period in 2017, asset yields increased 22 basis points, while the cost of interest-bearing liabilities increased 54 basis points. Most of this increase was the result of higher rates paid on short-term borrowings, interest-bearing demand deposits and time deposits, which is consistent with increases in the federal funds sold rate. 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 5 and 3 basis points for the quarters ended December 31, 2018 and 2017, respectively.

• Noninterest income
  Noninterest income increased 10.8% to $6.7 million for the quarter ended December 31, 2018 compared to $6.1 million in the same quarter of 2017. Trust fees increased $130 thousand or 8% in comparing the fourth quarter of 2018 to the same quarter in 2017. In the fourth quarter of 2018 security gains increased $255 thousand, other operating income increased $170 thousand or 76% and insurance agency commissions increased $112 thousand or 21% from the fourth quarter in 2017. These increases were offset by a drop in retirement plan consulting fees of $95 thousand or 20%.

• Noninterest expenses
  Farmers has remained committed to managing its level of noninterest expenses. Total noninterest expenses for the fourth quarter of 2018 increased 6.4% to $16.0 million compared to $15.0 million in the same quarter in 2017, primarily a result of increases in salaries and employee benefits of $747 thousand (which included a $390 thousand increase in salaries and a $381 thousand increase in health insurance expense due to higher claims in the fourth quarter), and a $373 thousand increase in other operation expenses. These increased expenses were offset by a $268 thousand decrease in merger related costs as a result of a $180 thousand reduction to the earnout liability associated with a prior acquisition. It is important to note that annualized noninterest expenses measured as a percentage of quarterly average assets remained low at 2.79% and 2.78% in the fourth quarters of 2018 and 2017, respectively.

• Efficiency ratio
  The efficiency ratio for the quarter ended December 31, 2018 improved to 57.73% compared to 58.40% for the same quarter in 2017. The main factors leading to this improvement were the increase in net interest income and noninterest income and a lower level of noninterest expenses relative to average assets as explained in the preceding paragraphs.

2019 Outlook

Mr. Helmick added, "We will look to enhance our wealth management and digital offerings as we anticipate maintaining the momentum from our diversified businesses to sustain strong performance in 2019.”

Founded in 1887, Farmers National Banc Corp. is a diversified financial services company headquartered in Canfield, Ohio, with $2.3 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 41 banking locations in Mahoning, Trumbull, Columbiana, Stark, Wayne, Medina and Cuyahoga Counties in Ohio and Beaver County in Pennsylvania, Farmers Trust Company, which operates four trust offices and offers services in the same geographic markets, and National Associates, Inc. Total wealth management assets under care at December 31, 2018 are $2.6 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 can be found in Farmers’ Annual Report on Form 10-K for the year ended December 31, 2017, which has been filed with the Securities and Exchange Commission (SEC) and is 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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