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) ("Farmers" 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 Farmers' historically solid earnings capacity, with ROA generally sustained above 1.0%. Profitability has benefited from a healthy NIM, meaningful fee income contributions, and improving operating efficiency, aided by effective acquisition integration of Emclaire Financial Corp. ("Emclaire") and realized cost savings, as well as benign credit costs. Earnings came under pressure during the higher interest rate environment, as margin compression resulted from excess liquidity accumulated during the pandemic, much of which was deployed into longer-duration securities. However, performance has rebounded in recent quarters, with ROA once again exceeding 1.0% in 1H25. This improvement reflects margin expansion driven by Fed rate cuts, which helped ease funding costs, and the continued repricing of the loan and securities portfolios, which have together pushed earning asset yields higher despite the Fed's easing. Management expects these positive trends to continue, projecting ROA to return toward its historical 1.2%–1.3% range by 2026 as NIM expansion persists. Another key ratings differentiator is the meaningful noninterest income level, which typically accounts for 25% of operating revenue or greater (26% for 1H25), and tracks well above similarly rated peers. A key driver of this is its wealth management platform and trust segment with AUC of $4.4 billion, which generates attractive fee-based revenues that provide a stable and recurring revenue stream, supported by favorable secular growth trends. The company's strategy of building targeted scale in wealth management not only enhances earnings stability but also strengthens long-term customer relationships, creating meaningful opportunities to cross-sell additional banking services over time. Fee revenues also benefit from considerable insurance agency commissions, deposit service charges, and interchange fees, all of which are also fairly durable.
FMNB's asset quality remains solid, underpinned by prudent underwriting standards and a well-diversified loan portfolio. While the NPA ratio has trended higher and currently exceeds the rated peer average, this reflects normalization in borrower health following post-pandemic lows, as well as some idiosyncratic weakness in the office sector within the Pittsburgh market. Despite this uptick, management expects NCOs to remain well-contained. The company's exposure to the office sector is manageable at 6% of total loans, with the majority located in suburban markets underwritten with conservative terms. Additionally, the concentration of investor CRE remains comfortably below the rated peer average, at 179% of total risk-based capital as of 2Q25. Outside of these select issues, credit performance has remained broadly stable across the portfolio. With an improved capital position, enhanced earnings profile, and reserves representing 1.17% of total loans, Farmers appears well positioned to navigate a potentially weaker economic environment while maintaining sound asset quality. Capital ratios have continued to rebound following the 2023 acquisition of Emclaire (which added $1.1 billion in assets and involved 30% cash consideration). The recovery reflects modest balance sheet growth and a solid level of internal capital generation supported by improving profitability trends. That said, shareholder returns through dividends remain somewhat elevated, with payout ratios ranging between 40% and 60% in recent years. As of 2Q25, Farmers' risk-based capital ratios are positioned near the rated peer average, though the TCE ratio remains well below peers due to continued negative AOCI pressure from its sizable, longer-duration securities portfolio. This pressure is expected to ease in a declining rate environment, with further improvement supported by sustained earnings growth. KBRA also views Farmers' liquidity position favorably, underpinned by a conservative loan-to-deposit ratio that has generally remained in the mid-70% range (75% as of 2Q25). This positioning limits reliance on wholesale funding and helps support a strong core deposit franchise, which benefits from a solid mix (23% NIB accounts) and relatively low costs (1.82% in 2Q25). While a sizable portion of on-balance sheet liquidity is held in the securities portfolio (25% of total assets) that carries meaningful unrealized losses, KBRA takes comfort in the company's ample contingent funding sources and steady cashflow generation from the portfolio, which provide flexibility to support loan growth or absorb potential deposit outflows.
Rating Sensitivities
Sustained improvement in profitability consistently tracking near historical levels, continued growth in capital ratios that steadily track above the rated peer averages, and maintaining strong credit quality metrics could support positive rating momentum over the longer term. Credit deterioration beyond expectations relative to peers and aggressive management of capital could result in rating pressure.
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Methodologies
- Financial Institutions: Bank & Bank Holding Company Global Rating Methodology
- ESG Global Rating Methodology
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan's Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.
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Analytical Contacts
Indra Elangovan, Director (Lead Analyst)
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Brian Ropp, Managing Director
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