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UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly period ended March 31, 2021

Commission file number 001-35296

 

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34-1371693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No)

 

 

 

20 South Broad Street Canfield, OH

 

44406

(Address of principal executive offices)

 

(Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, No Par Value

FMNB

The NASDAQ Stock Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at April 30, 2021

Common Stock, No Par Value

 

28,308,394 shares

 

 

 

 

 

 

 


 

 

 

Page Number

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

Included in Part I of this report:

 

 

 

 

 

Farmers National Banc Corp. and Subsidiaries

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income

4

 

Consolidated Statements of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

Item 4

Controls and Procedures

51

 

 

 

PART II - OTHER INFORMATION

51

 

 

 

Item 1

Legal Proceedings

51

 

 

 

Item 1A

Risk Factors

51

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3

Defaults Upon Senior Securities

52

 

 

 

Item 4

Mine Safety Disclosures

52

 

 

 

Item 5

Other Information

52

 

 

 

Item 6

Exhibits

53

 

 

SIGNATURES

54

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1


 

 

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

March 31,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

23,165

 

 

$

20,503

 

Federal funds sold and other

 

 

303,220

 

 

 

234,118

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

326,385

 

 

 

254,621

 

Securities available for sale - amortized cost $790,294 in 2021, $547,711 in 2020

 

 

802,866

 

 

 

575,600

 

Equity securities

 

 

6,902

 

 

 

6,881

 

Loans held for sale

 

 

3,993

 

 

 

4,766

 

Loans

 

 

2,037,404

 

 

 

2,078,044

 

Less allowance for credit losses

 

 

24,935

 

 

 

22,144

 

NET LOANS

 

 

2,012,469

 

 

 

2,055,900

 

Premises and equipment, net

 

 

25,373

 

 

 

25,620

 

Goodwill

 

 

45,775

 

 

 

45,775

 

Other intangibles, net

 

 

3,526

 

 

 

3,842

 

Bank owned life insurance

 

 

51,606

 

 

 

51,322

 

Other assets

 

 

45,629

 

 

 

46,821

 

TOTAL ASSETS

 

$

3,324,524

 

 

$

3,071,148

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

675,045

 

 

$

608,791

 

Interest-bearing

 

 

2,126,009

 

 

 

1,970,087

 

Brokered time deposits

 

 

32,000

 

 

 

32,000

 

TOTAL DEPOSITS

 

 

2,833,054

 

 

 

2,610,878

 

Short-term borrowings

 

 

5,210

 

 

 

2,521

 

Long-term borrowings

 

 

74,473

 

 

 

76,385

 

Other liabilities

 

 

64,432

 

 

 

31,267

 

TOTAL LIABILITIES

 

 

2,977,169

 

 

 

2,721,051

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 50,000,000 shares; issued 29,577,827 in 2021 and 2020

 

 

208,199

 

 

 

208,763

 

Retained earnings

 

 

147,583

 

 

 

138,073

 

Accumulated other comprehensive income

 

 

9,932

 

 

 

22,032

 

Treasury stock, at cost; 1,341,136 shares in 2021 and 1,387,655 in 2020

 

 

(18,359

)

 

 

(18,771

)

TOTAL STOCKHOLDERS' EQUITY

 

 

347,355

 

 

 

350,097

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

3,324,524

 

 

$

3,071,148

 

 

See accompanying notes

 

 

 

2


 

 

CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands except Per Share Data)

 

 

 

For the Three Months Ended

 

(Unaudited)

 

March 31,

2021

 

 

March 31,

2020

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

23,805

 

 

$

24,099

 

Taxable securities

 

 

1,719

 

 

 

1,547

 

Tax exempt securities

 

 

2,074

 

 

 

1,782

 

Dividends

 

 

121

 

 

 

140

 

Federal funds sold and other interest income

 

 

71

 

 

 

149

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

27,790

 

 

 

27,717

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

2,226

 

 

 

4,639

 

Short-term borrowings

 

 

4

 

 

 

320

 

Long-term borrowings

 

 

293

 

 

 

456

 

TOTAL INTEREST EXPENSE

 

 

2,523

 

 

 

5,415

 

NET INTEREST INCOME

 

 

25,267

 

 

 

22,302

 

Provision for credit losses

 

 

425

 

 

 

1,100

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

24,842

 

 

 

21,202

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

808

 

 

 

1,095

 

Bank owned life insurance income

 

 

284

 

 

 

208

 

Trust fees

 

 

2,236

 

 

 

1,857

 

Insurance agency commissions

 

 

1,001

 

 

 

883

 

Security gains, including fair value changes for equity securities

 

 

488

 

 

 

157

 

Retirement plan consulting fees

 

 

320

 

 

 

380

 

Investment commissions

 

 

504

 

 

 

423

 

Net gains on sale of loans

 

 

3,185

 

 

 

1,366

 

Debit card and EFT fees

 

 

1,084

 

 

 

851

 

Other operating income

 

 

673

 

 

 

650

 

TOTAL NONINTEREST INCOME

 

 

10,583

 

 

 

7,870

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,976

 

 

 

10,231

 

Occupancy and equipment

 

 

2,275

 

 

 

1,800

 

State and local taxes

 

 

554

 

 

 

464

 

Professional fees

 

 

1,056

 

 

 

816

 

Merger related costs

 

 

12

 

 

 

1,319

 

Advertising

 

 

260

 

 

 

271

 

FDIC insurance

 

 

170

 

 

 

225

 

Intangible amortization

 

 

316

 

 

 

332

 

Core processing charges

 

 

627

 

 

 

861

 

Telephone and data

 

 

138

 

 

 

203

 

Other operating expenses

 

 

2,384

 

 

 

2,215

 

TOTAL NONINTEREST EXPENSES

 

 

17,768

 

 

 

18,737

 

INCOME BEFORE INCOME TAXES

 

 

17,657

 

 

 

10,335

 

INCOME TAXES

 

 

3,101

 

 

 

1,696

 

NET INCOME

 

$

14,556

 

 

$

8,639

 

EARNINGS PER SHARE - basic

 

$

0.52

 

 

$

0.30

 

EARNINGS PER SHARE - fully diluted

 

$

0.51

 

 

$

0.30

 

 

See accompanying notes

 

3


 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

(Unaudited)

 

March 31,

2021

 

 

March 31,

2020

 

NET INCOME

 

$

14,556

 

 

$

8,639

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Net unrealized holding (losses) on available for sale securities

 

 

(14,934

)

 

 

(12,217

)

Reclassification adjustment for (gains) realized in income

 

 

(383

)

 

 

(256

)

Net unrealized holding (losses)

 

 

(15,317

)

 

 

(12,473

)

Income tax effect

 

 

3,217

 

 

 

2,619

 

Other comprehensive (loss), net of tax

 

 

(12,100

)

 

 

(9,854

)

TOTAL COMPREHENSIVE INCOME (LOSS)

 

$

2,456

 

 

$

(1,215

)

 

See accompanying notes

 

4


 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

(Unaudited)

 

March 31,

2021

 

 

March 31,

2020

 

COMMON STOCK

 

 

 

 

 

 

 

 

Beginning balance

 

$

208,763

 

 

$

186,345

 

Issued 54,639 treasury shares in 2021 and 1,334 treasury shares in 2020 under the Long Term Incentive Plan

 

 

(894

)

 

 

(22

)

Issued 1,398,229 in 2020 as part of a business combination

 

 

0

 

 

 

22,554

 

Stock compensation expense for unvested shares

 

 

330

 

 

 

337

 

Ending balance

 

 

208,199

 

 

 

209,214

 

 

 

 

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

 

 

 

 

Beginning balance

 

 

138,073

 

 

 

108,851

 

Net income

 

 

14,556

 

 

 

8,639

 

Cumulative impact of ASU 2016-13 adoption (CECL)

 

 

(1,936

)

 

 

0

 

Dividends declared at $0.11 per share in 2021 and $0.11 per share in 2020

 

 

(3,110

)

 

 

(3,139

)

Ending balance

 

 

147,583

 

 

 

114,351

 

 

 

 

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

Beginning balance

 

 

22,032

 

 

 

9,826

 

Other comprehensive (loss)

 

 

(12,100

)

 

 

(9,854

)

Ending balance

 

 

9,932

 

 

 

(28

)

 

 

 

 

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

 

 

 

 

Beginning balance

 

 

(18,771

)

 

 

(5,713

)

Purchased 8,120 shares in 2021 and 942,967 shares in 2020

 

 

(116

)

 

 

(14,238

)

Issued 75,709 shares in 2021 and 2,000 shares in 2020 under the Long Term Incentive Plan

 

 

894

 

 

 

22

 

Retained 21,070 shares in 2021 and 666 shares in 2020 to cover tax withholdings under the Long Term Incentive Plan

 

 

(366

)

 

 

(11

)

Ending balance

 

 

(18,359

)

 

 

(19,940

)

TOTAL STOCKHOLDERS' EQUITY

 

$

347,355

 

 

$

303,597

 

 

 

See accompanying notes.

 

5


 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

Three Months Ended

 

(Unaudited)

 

March 31,

2021

 

 

March 31,

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

14,556

 

 

$

8,639

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

425

 

 

 

1,100

 

Depreciation and amortization

 

 

798

 

 

 

751

 

Net amortization of securities

 

 

618

 

 

 

488

 

Available for sale security (gains)

 

 

(383

)

 

 

(256

)

Realized (gains) losses on equity securities

 

 

(105

)

 

 

99

 

Loss on premises and equipment sales and disposals, net

 

 

52

 

 

 

77

 

Stock compensation expense

 

 

330

 

 

 

337

 

Earnings on bank owned life insurance

 

 

(284

)

 

 

(208

)

Origination of loans held for sale

 

 

(51,990

)

 

 

(31,012

)

Proceeds from loans held for sale

 

 

55,948

 

 

 

31,706

 

Net gains on sale of loans

 

 

(3,185

)

 

 

(1,366

)

Net change in other assets and liabilities

 

 

(9,743

)

 

 

(4,574

)

NET CASH FROM OPERATING ACTIVITIES

 

 

7,037

 

 

 

5,781

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

17,440

 

 

 

9,622

 

Proceeds from sales of securities available for sale

 

 

26,186

 

 

 

15,126

 

Purchases of securities available for sale

 

 

(241,345

)

 

 

(25,224

)

Proceeds from sales of equity securities

 

 

20

 

 

 

0

 

Purchase of equity securities

 

 

(221

)

 

 

(423

)

Proceeds from redemption of restricted stock

 

 

253

 

 

 

255

 

Purchase of restricted stock

 

 

(22

)

 

 

(1,825

)

Loan originations and payments, net

 

 

42,976

 

 

 

15,602

 

Proceeds from land and building sales

 

 

0

 

 

 

502

 

Additions to premises and equipment

 

 

(219

)

 

 

(2,279

)

Net cash paid in business combinations

 

 

0

 

 

 

(8,136

)

NET CASH FROM INVESTING ACTIVITIES

 

 

(154,932

)

 

 

3,220

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

222,176

 

 

 

54,062

 

Net change in short-term borrowings

 

 

2,689

 

 

 

(32,052

)

Repayment of long-term borrowings

 

 

(1,980

)

 

 

(1,287

)

Cash dividends paid

 

 

(3,110

)

 

 

(3,139

)

Repurchase of common shares

 

 

(116

)

 

 

(14,238

)

NET CASH FROM FINANCING ACTIVITIES

 

 

219,659

 

 

 

3,346

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

71,764

 

 

 

12,347

 

Beginning cash and cash equivalents

 

 

254,621

 

 

 

70,760

 

Ending cash and cash equivalents

 

$

326,385

 

 

$

83,107

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,597

 

 

$

5,158

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

30

 

 

$

0

 

Security purchases not settled

 

$

44,814

 

 

$

0

 

Issuance of stock awards

 

$

894

 

 

$

22

 

Issuance of stock for business combinations

 

$

0

 

 

$

22,554

 

 

See accompanying notes

 

 

6


 

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended.  The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”).  The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Farmers National Insurance, LLC (“Insurance”) and Farmers of Canfield Investment Co. (“Investments”).  The Company provides trust and retirement consulting services through its subsidiary, Farmers Trust Company (“Trust”), and insurance services through the Bank’s subsidiary, Insurance.  Farmers National Captive, Inc. (“Captive”) is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries.  The Captive pools resources with eleven other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place.  The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust and Captive.  All significant intercompany balances and transactions have been eliminated in the consolidation.

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented.  The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.  Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

Estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio and western Pennsylvania.  Operations are managed and financial performance is primarily aggregated and reported in two lines of business, the Bank segment and the Trust segment.

Equity:

There are 50,000,000 shares authorized and available for issuance as of March 31, 2021.  Outstanding shares at March 31, 2021 were 28,236,691.

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income consists of unrealized gains and losses on securities available for sale (“AFS”), which are recognized as components of stockholders’ equity, net of tax effect.

Updates to Significant Accounting Policies:

Allowance for Credit Losses – Available-for-Sale Securities:  

Securities classified as AFS are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity.  Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.

7


 

The Company evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized costs basis is due to credit-related factors or noncredit-related factors.  In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.  Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes.  Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income.  Both the ACL and the charge to net income may be reversed if conditions change.  However, if the Company intends to sell an impaired AFS security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in net income with a corresponding adjustment to the security’s amortized cost basis rather than through the establishment of an ACL.  The Company has recorded no ACL related to the investment portfolio as of March 31, 2021.

Allowance for Credit Losses – Loans:  

The ACL represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date.  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.

Prior to January 1, 2021, as described in further detail in the Company’s 2020 Annual Report on Form 10-K, the Company used an incurred loss impairment model.  This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors.  Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan was collateral dependent.  Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.

On January 1, 2021, the Company adopted the current expected credit loss model (“CECL”).  This methodology for calculating the allowance for credit losses considers the possibility of loss over the life of the loan.  It also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan.  To develop the ACL estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements.  The Company uses the cohort (“cohort”) and the probability of default/loss given default (“PD/LGD”) methodologies as described in the Credit Quality Indicators section of the loan footnote.      

Risks and Uncertainties:

The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company.  The spread of the outbreak has caused disruptions in the economy and has disrupted banking and other financial activity in the areas in which the Company operates.  While there has been no material impact to the Company’s business continuity or financial condition the possible of future challenges continues to exist.  

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout.  Most notably, the Coronavirus Aid, Relief and Economic Security Act (“CARES”) the Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES”), both signed into law during 2020, and the American Rescue Plan Act as multi trillion dollar legislative packages, and the American Rescue Plan Act signed into law on March 11, 2021, as a $1.9 trillion COVID-19 relief bill.  The goal of these acts was to provide economic stability during the pandemic through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.  The packages also included extensive emergency funding for hospitals and providers. The American Rescue Plan continued these measures by funding increases in vaccine distribution, additional cash payments to millions of Americans, extended unemployment benefits, and support for caregiving, nutrition programs, health care and pensions.  In addition to the general impact of COVID-19, certain provisions of the these legislative acts as well as other recent legislative and regulatory relief efforts have had a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions.  If the global response to contain COVID-19 continues for a further extended period or is ultimately unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.  While it is not possible to know the full universe or extent that the impact of COVID-19 will have on the Company’s operations, the Company will disclose potentially material items of which it becomes aware.

8


 

Financial position and results of operations:

The Company’s fee income declined and could be reduced further due to lingering COVID-19 affects.  In keeping with guidance from regulators, the Company worked with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc.  From the beginning of the pandemic in 2020 through the quarter ended March 31, 2021, the Company has waived $780 thousand in fees.  The Company recognizes the breadth of the economic impact is likely to continue impacting its fee income in future periods.

The Company’s interest income improved slightly in the quarter ended March 31, 2021 compared to the same period in 2020 and yet the net interest margin decreased by 17 basis points.  The margin could be reduced further due to COVID-19 and the continued low interest rate environment.  In keeping with guidance from regulators, the Company is working with COVID-19 affected borrowers to defer their payments.  Currently the Bank has five loans remaining that are deferring their loan payments.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, the Company is unable to project the materiality of such an impact, but recognizes the breadth of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity:

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.  The Company relies on cash on hand as well as dividends from its subsidiaries.  If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to pay dividends to shareholders.

The Company maintains access to multiple sources of liquidity.  Wholesale funding markets have remained open.  Rates for short term funding have recently been low but if funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin.  If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

 

New Accounting Standards:

Reacting to the global markets’ planned shift away from using major interbank reference rates, including the London Interbank Offered Rate (LIBOR), the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to ease the burden of accounting for contract modifications related to reference rate reform. The amendments in ASU 2020-04 create a new Topic in the Codification, ASC 848, Reference Rate Reform, which contains guidance that is designed to simplify how entities account for contracts that are modified to replace LIBOR or other benchmark interest rates with new rates. The amendments in ASU 2020-04 give entities the option to apply expedients and exceptions to contract modifications that are made until December 31, 2022, if certain criteria are met.  If adopted, these amendments and exceptions should be applied to all eligible modifications to contracts that are accounted for under an ASC Topic or industry Subtopic.  The guidance in ASC 848 will not apply to any contract modifications made after December 31, 2022.  Management is still evaluating the ASU and has not adopted it as of March 31, 2021.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test.  Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.  The Company adopted this ASU on January 1, 2020.  The adoption of this guidance did not have an impact on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13: Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (modified by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments Credit Losses).  The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses.  Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.  Additionally, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019.  Entities

9


 

will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

In accordance with the accounting relief provisions of CARES and subsequent provisions of HEROES, the Bank postponed the adoption of the current expected credit losses (“CECL”) accounting standard from January 1, 2020 to January 1, 2021.  The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures.  Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.  The Company recorded the onetime adjustment to equity in the amount of $1.9 million, net of tax which increased the allowance for credit losses $2.5 million.

Business Combinations:

On January 7, 2020, the Company completed the acquisition of Maple Leaf Financial, Inc. (“Maple Leaf”), the parent company of Geauga Savings Bank, with branches located in Cuyahoga and Geauga Counties in Ohio.  The Company expects the acquisition to increase synergies and cost savings resulting from the combining of the two companies.  The transaction involved both cash and 1,398,229 shares of stock totaling $43.0 million.  Pursuant to the terms of the Merger Agreement, common shareholders of Maple Leaf had the right to receive $640.00 in cash or 45.5948 common shares, without par value, of the Company.  Holders of outstanding and unexercised warrants to purchase Maple Leaf Common Shares received an amount in cash equal to the excess of $640.00 over $370.00, the exercise price of such warrants.

Goodwill of $7.6 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the entities.  The goodwill was determined not to be deductible for income tax purposes.  

The following table summarizes the consideration paid for Maple Leaf and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.

 

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

20,423

 

Stock

 

22,554

 

Fair value of total consideration transferred

$

42,977

 

Fair value of assets acquired

 

 

 

Cash and due from financial institutions

$

18,219

 

Securities available for sale

 

69,547

 

Loans

 

181,280

 

Premises and equipment

 

229

 

Core deposit intangible

 

725

 

Other assets

 

6,398

 

Total assets

 

276,398

 

Fair value of liabilities assumed

 

 

 

Deposits

 

183,251

 

Long-term borrowings

 

54,487

 

Accrued interest payable and other liabilities

 

3,257

 

Total liabilities

$

240,995

 

Net assets acquired

 

35,403

 

Goodwill created

 

7,574

 

Total net assets acquired

$

42,977

 

 

 

The following table presents pro forma information as if the Maple Leaf acquisition that occurred during January 2020 actually took place at the beginning of 2020.  The pro forma information includes adjustments for merger related costs, amortization of intangibles arising from the transaction and the related income tax effects.  The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effective on the assumed date.

 

 

 

10


 

 

 

For Three Months Ended March 30,

 

(In thousands of dollars except per share results)

2020

 

Net interest income

$

22,482

 

Net income

$

8,659

 

Basic and diluted earnings per share

$

0.30

 

 

 

Securities:

The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at March 31, 2021 and December 31, 2020 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

17,356

 

 

$

79

 

 

$

(370

)

 

$

17,065

 

State and political subdivisions

 

447,203

 

 

 

15,903

 

 

 

(2,689

)

 

 

460,417

 

Corporate bonds

 

3,679

 

 

 

92

 

 

 

(34

)

 

 

3,737

 

Mortgage-backed securities - residential

 

301,457

 

 

 

3,366

 

 

 

(4,301

)

 

 

300,522

 

Collateralized mortgage obligations - residential

 

15,499

 

 

 

440

 

 

 

(4

)

 

 

15,935

 

Small Business Administration

 

5,100

 

 

 

90

 

 

 

0

 

 

 

5,190

 

Totals

$

790,294

 

 

$

19,970

 

 

$

(7,398

)

 

$

802,866

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

11,798

 

 

$

101

 

 

$

(54

)

 

$

11,845

 

State and political subdivisions

 

344,160

 

 

 

22,350

 

 

 

(204

)

 

 

366,306

 

Corporate bonds

 

3,582

 

 

 

132

 

 

 

(2

)

 

 

3,712

 

Mortgage-backed securities - residential

 

157,106

 

 

 

4,919

 

 

 

(243

)

 

 

161,782

 

Collateralized mortgage obligations - residential

 

25,654

 

 

 

742

 

 

 

(3

)

 

 

26,393

 

Small Business Administration

 

5,411

 

 

 

151

 

 

 

0

 

 

 

5,562

 

Totals

$

547,711

 

 

$

28,395

 

 

$

(506

)

 

$

575,600

 

 

Proceeds from the sale of portfolio securities were $26.2 million during the three month period ended March 31, 2021.  Gross gains of $406.0 thousand along with gross losses of $22.6 thousand were realized on these sales during the three month period ended March 31, 2021.  $105 thousand of realized gains during the three month period were recognized in the income statement for equity securities as of March 31, 2021.  Proceeds from the sale of portfolio securities were $15.1 million during the three month period ended March 31, 2020.  Gross gains were $256 thousand along with gross losses of $0 during the same three month ended March 31, 2020.  $99 thousand of realized losses during the three month period ended March 31, 2020 were recognized in the income statement for equity securities.

11


 

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

 

 

March 31, 2021

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

3,006

 

 

$

3,044

 

One to five years

 

 

5,430

 

 

 

5,685

 

Five to ten years

 

 

44,780

 

 

 

46,080

 

Beyond ten years

 

 

415,022

 

 

 

426,410

 

Mortgage-backed, collateralized mortgage obligations and Small Business Administration securities

 

 

322,056

 

 

 

321,647

 

Total

 

$

790,294

 

 

$

802,866

 

 

 

The following table summarizes the available for sale investment securities with unrealized losses at March 31, 2021 and December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position.   

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(In Thousands of Dollars)

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

13,845

 

 

$

(370

)

 

$

0

 

 

$

0

 

 

$

13,845

 

 

$

(370

)

State and political subdivisions

 

 

84,208

 

 

 

(2,689

)

 

 

0

 

 

 

0

 

 

 

84,208

 

 

 

(2,689

)

Corporate bonds

 

 

714

 

 

 

(34

)

 

 

0

 

 

 

0

 

 

 

714

 

 

 

(34

)

Mortgage-backed securities - residential

 

 

153,691

 

 

 

(4,301

)

 

 

0

 

 

 

0

 

 

 

153,691

 

 

 

(4,301

)

Collateralized mortgage obligations - residential

 

 

277

 

 

 

(4

)

 

 

0

 

 

 

0

 

 

 

277

 

 

 

(4

)

Total

 

$

252,735

 

 

$

(7,398

)

 

$

0

 

 

$

0

 

 

$

252,735

 

 

$

(7,398

)

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

(In Thousands of Dollars)

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

8,153

 

 

$

(54

)

 

$

0

 

 

$

0

 

 

$

8,153

 

 

$

(54

)

State and political subdivisions

 

 

19,205

 

 

 

(204

)

 

 

0

 

 

 

0

 

 

 

19,205

 

 

 

(204

)

Corporate bonds

 

 

198

 

 

 

(2

)

 

 

0

 

 

 

0

 

 

 

198

 

 

 

(2

)

Mortgage-backed securities - residential

 

 

63,401

 

 

 

(243

)

 

 

0

 

 

 

0

 

 

 

63,401

 

 

 

(243

)

Collateralized mortgage obligations - residential

 

 

294

 

 

 

(3

)

 

 

0

 

 

 

0

 

 

 

294

 

 

 

(3

)

Total

 

$

91,251

 

 

$

(506

)

 

$

0

 

 

$

0

 

 

$

91,251

 

 

$

(506

)

 

The Company has adopted ASU 2016-13 that makes improvements to the accounting for credit losses on securities available for sale.  The concept of other than-temporarily impaired securities has been replaced with the allowance for credit losses.  Securities available for sale are evaluated on an individual level and pooling of securities is no longer an option.  During this evaluation process, management considers the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.      

 

If the Company determines that a credit loss exists, the credit portion of the allowance will be measured using a discounted cash flow analysis using the effective interest rate as of the security’s purchase date.  As of March 31, 2021, the Company’s security portfolio consisted of 767 securities, 153 of which were in an unrealized loss position.  The majority of the unrealized losses on the Company’s securities are related to its holdings of state and political subdivisions and mortgage-backed securities.  The Company does not consider its AFS securities with unrealized losses to be attributable to credit-related factors, as the unrealized losses have occurred as a result of changes in noncredit related factors such as changes in interest rates, market spreads and market conditions subsequent to purchase, not credit deterioration.  As of March 31, 2021 no allowance for credit losses on AFS securities was recorded.

12


 

Loans:

Loan balances were as follows:

 

(In Thousands of Dollars)

 

March 31, 2021

 

 

December 31, 2020

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

210,435

 

 

$

215,187

 

Non-owner occupied

 

 

313,482

 

 

 

309,777

 

Farmland

 

 

156,568

 

 

 

156,277

 

Other

 

 

73,572

 

 

 

78,140

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

391,041

 

 

 

385,831

 

Agricultural

 

 

42,060

 

 

 

44,922

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

319,155

 

 

 

324,723

 

Home equity lines of credit

 

 

91,027

 

 

 

92,968

 

Consumer

 

 

 

 

 

 

 

 

Indirect

 

 

157,935

 

 

 

164,620

 

Direct

 

 

21,322

 

 

 

23,348

 

Other

 

 

9,258

 

 

 

9,868

 

Total originated loans

 

$

1,785,855

 

 

$

1,805,661

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

43,955

 

 

$

45,101

 

Non-owner occupied

 

 

48,534

 

 

 

52,863

 

Farmland

 

 

24,646

 

 

 

26,080

 

Other

 

 

12,578

 

 

 

12,868

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

15,023

 

 

 

18,662

 

Agricultural

 

 

3,799

 

 

 

4,850

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

81,827

 

 

 

89,118

 

Home equity lines of credit

 

 

16,474

 

 

 

17,383

 

Consumer

 

 

 

 

 

 

 

 

Direct

 

 

4,662

 

 

 

5,128

 

Other

 

 

118

 

 

 

97

 

Total acquired loans

 

$

251,616

 

 

$

272,150

 

Net Deferred loan (fees) costs

 

 

(67

)

 

 

233

 

Allowance for credit losses

 

 

(24,935

)

 

 

(22,144

)

Net loans

 

$

2,012,469

 

 

$

2,055,900

 

 

13


 

 

Purchased credit impaired loans under ASC 310

As part of past acquisitions, the Company acquired various loans that displayed evidence of deterioration of credit quality since origination and which it was probable that all contractually required payments would not be collected. The carrying amounts and contractually required payments of these purchase credit impaired loans under ASC 310, which are included in the loan balances above, are summarized in the following table:

 

(In Thousands of Dollars)

 

 

 

December 31, 2020

 

Commercial real estate

 

 

 

 

 

 

Non-owner occupied

 

 

 

$

574

 

Commercial

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

604

 

Total outstanding balance

 

 

 

$

1,178

 

Carrying amount, net of allowance of $0 in 2020

 

 

 

$

917

 

 

 

 

The key assumptions considered include probability of default and the amount of actual prepayments after the acquisition date.  Prepayments affect the estimated life of the loans and could change the amount of interest income and principal expected to be collected.  In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary.  There were no adjustments to forecasted cash flows that impacted the allowance for credit losses for the three month periods ended March 31, 2021 and 2020.

Allowance for credit loss activity

The following tables present the activity in the allowance for credit losses by portfolio segment for the three month periods ended March 31, 2021 and 2020:

Three Months Ended March 31, 2021

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Total

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

10,824

 

 

$

5,073

 

 

$

3,643

 

 

$

2,604

 

 

$

22,144

 

Impact of CECL adoption

 

 

(2,076

)

 

 

429

 

 

 

237

 

 

 

3,860

 

 

 

2,450

 

Provision for credit losses

 

 

96

 

 

 

(25

)

 

 

89

 

 

 

265

 

 

 

425

 

Loans charged off

 

 

0

 

 

 

(34

)

 

 

(67

)

 

 

(183

)

 

 

(284

)

Recoveries

 

 

0

 

 

 

7

 

 

 

59

 

 

 

134

 

 

 

200

 

Total ending allowance balance

 

$

8,844

 

 

$

5,450

 

 

$

3,961

 

 

$

6,680

 

 

$

24,935

 

 

 

Three Months Ended March 31, 2020

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

5,843

 

 

$

2,323

 

 

$

2,875

 

 

$

2,710

 

 

$

736

 

 

$

14,487

 

Provision for loan losses

 

 

717

 

 

 

495

 

 

 

129

 

 

 

324

 

 

 

(565

)

 

 

1,100

 

Loans charged off

 

 

0

 

 

 

(198

)

 

 

(108

)

 

 

(443

)

 

 

0

 

 

 

(749

)

Recoveries

 

 

1

 

 

 

1

 

 

 

15

 

 

 

97

 

 

 

0

 

 

 

114

 

Total ending allowance balance

 

$

6,561

 

 

$

2,621

 

 

$

2,911

 

 

$

2,688

 

 

$

171

 

 

$

14,952

 

14


 

 

 

 

 

The following table presents the allowance for loan losses under ASC 310.  The recorded investment in loans includes the unpaid principal balance and unamortized loan origination fees and costs, but excludes accrued interest receivable, which is not considered to be material:

December 31, 2020

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending allowance balance attributable to loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

0

 

 

$

357

 

 

$

79

 

 

$

0

 

 

$

0

 

 

$

436

 

Collectively evaluated for impairment

 

 

10,400

 

 

 

4,546

 

 

 

3,392

 

 

 

2,520

 

 

 

668

 

 

 

21,526

 

Acquired loans collectively evaluated for impairment

 

 

97

 

 

 

17

 

 

 

65

 

 

 

3

 

 

 

0

 

 

 

182

 

Acquired with deteriorated credit quality

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total ending allowance balance

 

$

10,497

 

 

$

4,920

 

 

$

3,536

 

 

$

2,523

 

 

$

668

 

 

$

22,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

502

 

 

$

3,086

 

 

$

2,836

 

 

$

189

 

 

$

0

 

 

$

6,613

 

Loans collectively evaluated for impairment

 

 

758,050

 

 

 

424,379

 

 

 

414,568

 

 

 

203,447

 

 

 

0

 

 

 

1,800,444

 

Acquired loans

 

 

135,884

 

 

 

23,044

 

 

 

105,936

 

 

 

5,206

 

 

 

0

 

 

 

270,070

 

Acquired with deteriorated credit quality

 

 

514

 

 

 

403

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

917

 

Total ending loans balance

 

$

894,950

 

 

$

450,912

 

 

$

523,340

 

 

$

208,842

 

 

$

0

 

 

$

2,078,044

 

The following table presents information related to impaired loans by class of loans under ASC 310 as of December 31, 2020.

 

(In Thousands of Dollars)

 

Unpaid Principal

Balance

 

 

Recorded

Investment

 

 

Allowance for

Loan Losses

Allocated

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

$

37

 

 

$

31

 

 

$

0

 

Farmland

 

 

484

 

 

 

471

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

151

 

 

 

105

 

 

 

0

 

Agricultural

 

 

27

 

 

 

26

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,660

 

 

 

1,872

 

 

 

0

 

Home equity lines of credit

 

 

435

 

 

 

334

 

 

 

0

 

Consumer

 

 

429

 

 

 

186

 

 

 

0

 

Subtotal

 

 

4,223

 

 

 

3,025

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

3,007

 

 

 

2,955

 

 

 

357

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

626

 

 

 

627

 

 

 

75

 

Home equity lines of credit

 

 

22

 

 

 

3

 

 

 

4

 

Consumer

 

 

2

 

 

 

3

 

 

 

0

 

Subtotal

 

 

3,657

 

 

 

3,588

 

 

 

436

 

Total

 

$

7,880

 

 

$

6,613

 

 

$

436

 

 

15


 

 

The following table presents the average recorded investment in impaired loans by class and interest income recognized by loan, under ASC 310, for the three month period ended March 31, 2020:

 

 

 

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

(In Thousands of Dollars)

 

 

 

For Three Months Ended

March 31, 2020

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

Non-owner occupied

 

 

 

$

34

 

 

$

0

 

Farmland

 

 

 

 

517

 

 

 

1

 

Commercial

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

132

 

 

 

2

 

Agricultural

 

 

 

 

17

 

 

 

1

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

2,139

 

 

 

38

 

Home equity lines of credit

 

 

 

 

368

 

 

 

6

 

Consumer

 

 

 

 

244

 

 

 

7

 

Subtotal

 

 

 

 

3,451

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

Farmland

 

 

 

 

0

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

52

 

 

 

1

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

701

 

 

 

8

 

Home equity lines of credit

 

 

 

 

99

 

 

 

0

 

Consumer

 

 

 

 

0

 

 

 

0

 

Subtotal

 

 

 

 

852

 

 

 

9

 

Total

 

 

 

$

4,303

 

 

$

64

 

 

 

Cash basis interest recognized during the three month period ended March 31, 2020 was materially equal to interest income recognized.

Nonaccrual loans and loans past due 90 days or more still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

16


 

The following table presents the recorded investment in nonaccrual and loans past due 90 days or more still on accrual by class of loans as of March 31, 2021 and December 31, 2020:

 

 

March 31, 2021

 

 

December 31, 2020

 

(In Thousands of Dollars)

 

Nonaccrual

 

 

Loans Past

Due 90 Days

or More

Still Accruing

 

 

Nonaccrual

 

 

Loans Past

Due 90 Days

or More

Still Accruing

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

323

 

 

$

0

 

 

$

0

 

 

$

335

 

Farmland

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

2,485

 

 

 

11

 

 

 

3,312

 

 

 

22

 

Agricultural

 

 

215

 

 

 

0

 

 

 

205

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

843

 

 

 

73

 

 

 

866

 

 

 

223

 

Home equity lines of credit

 

 

582

 

 

 

8

 

 

 

603

 

 

 

0

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

457

 

 

 

97

 

 

 

648

 

 

 

64

 

Direct

 

 

125

 

 

 

107

 

 

 

157

 

 

 

111

 

Other

 

 

0

 

 

 

3

 

 

 

1

 

 

 

5

 

Total originated loans

 

$

5,030

 

 

$

299

 

 

$

5,792

 

 

$

760

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

22

 

 

$

0

 

 

$

27

 

 

$

0

 

Non-owner occupied

 

 

345

 

 

 

0

 

 

 

362

 

 

 

0

 

Farmland

 

 

284

 

 

 

0

 

 

 

471

 

 

 

95

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

435

 

 

 

0

 

 

 

477

 

 

 

0

 

Agricultural

 

 

3

 

 

 

0

 

 

 

4

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

4,213

 

 

 

786

 

 

 

4,128

 

 

 

1,469

 

Home equity lines of credit

 

 

179

 

 

 

0

 

 

 

186

 

 

 

0

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

39

 

 

 

5

 

 

 

58

 

 

 

6

 

Total acquired loans

 

$

5,520

 

 

$

791

 

 

$

5,713

 

 

$

1,570

 

Total loans

 

$

10,550

 

 

$

1,090

 

 

$

11,505

 

 

$

2,330

 

 

 

17


 

 

The following tables present the aging of the recorded investment in past due loans as of March 31, 2021 and December 31, 2020 by class of loans.  Note that loans modified to defer payments under the CARES Act are included in loans not past due.

 

(In Thousands of Dollars)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or

More Past

Due and

Nonaccrual

 

 

Total Past

Due

 

 

Loans Not

Past Due

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

68

 

 

$

45

 

 

$

323

 

 

$

436

 

 

$

209,622

 

 

$

210,058

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

312,942

 

 

 

312,942

 

Farmland

 

 

124

 

 

 

0

 

 

 

0

 

 

 

124

 

 

 

156,197

 

 

 

156,321

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

73,390

 

 

 

73,390

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

104

 

 

 

31

 

 

 

2,496

 

 

 

2,631

 

 

 

384,807

 

 

 

387,438

 

Agricultural

 

 

46

 

 

 

0

 

 

 

215

 

 

 

261

 

 

 

41,949

 

 

 

42,210

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,258

 

 

 

102

 

 

 

916

 

 

 

2,276

 

 

 

316,014

 

 

 

318,290

 

Home equity lines of credit

 

 

198

 

 

 

38

 

 

 

590

 

 

 

826

 

 

 

90,211

 

 

 

91,037

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

508

 

 

 

220

 

 

 

554

 

 

 

1,282

 

 

 

162,145

 

 

 

163,427

 

Direct

 

 

357

 

 

 

43

 

 

 

232

 

 

 

632

 

 

 

20,796

 

 

 

21,428

 

Other

 

 

29

 

 

 

8

 

 

 

3

 

 

 

40

 

 

 

9,219

 

 

 

9,259

 

Total originated loans:

 

$

2,692

 

 

$

487

 

 

$

5,329

 

 

$

8,508

 

 

$

1,777,292

 

 

$

1,785,800

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

308

 

 

$

0

 

 

$

22

 

 

$

330

 

 

$

43,622

 

 

$

43,952

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

345

 

 

 

345

 

 

 

48,180

 

 

 

48,525

 

Farmland

 

 

0

 

 

 

0

 

 

 

284

 

 

 

284

 

 

 

24,362

 

 

 

24,646

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

12,578

 

 

 

12,578

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

388

 

 

 

0

 

 

 

435

 

 

 

823

 

 

 

14,200

 

 

 

15,023

 

Agricultural

 

 

0

 

 

 

36

 

 

 

3

 

 

 

39

 

 

 

3,759

 

 

 

3,798

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,950

 

 

 

56

 

 

 

4,999

 

 

 

8,005

 

 

 

73,822

 

 

 

81,827

 

Home equity lines of credit

 

 

45

 

 

 

45

 

 

 

179

 

 

 

269

 

 

 

16,205

 

 

 

16,474

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

146

 

 

 

30

 

 

 

44

 

 

 

220

 

 

 

4,443

 

 

 

4,663

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

118

 

 

 

118

 

Total acquired loans

 

$

3,837

 

 

$

167

 

 

$

6,311

 

 

$

10,315

 

 

$

241,289

 

 

$

251,604

 

Total loans

 

$

6,529

 

 

$

654

 

 

$

11,640

 

 

$

18,823

 

 

$

2,018,581

 

 

$

2,037,404

 

18


 

 

 

(In Thousands of Dollars)

 

30-59

Days Past

Due

 

 

60-89

Days Past

Due

 

 

90 Days or

More Past

Due and

Nonaccrual

 

 

Total Past

Due

 

 

Loans Not

Past Due

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

335

 

 

$

335

 

 

$

214,460

 

 

$

214,795

 

Non-owner occupied

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

309,216

 

 

 

309,216

 

Farmland

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

156,053

 

 

 

156,053

 

Other

 

 

261

 

 

 

0

 

 

 

0

 

 

 

261

 

 

 

77,725

 

 

 

77,986

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

356

 

 

 

61

 

 

 

3,334

 

 

 

3,751

 

 

 

378,594

 

 

 

382,345

 

Agricultural

 

 

45

 

 

 

255

 

 

 

205

 

 

 

505

 

 

 

44,555

 

 

 

45,060

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,668

 

 

 

974

 

 

 

1,089

 

 

 

3,731

 

 

 

320,129

 

 

 

323,860

 

Home equity lines of credit

 

 

419

 

 

 

0

 

 

 

603

 

 

 

1,022

 

 

 

91,957

 

 

 

92,979

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

1,046

 

 

 

285

 

 

 

712

 

 

 

2,043

 

 

 

168,245

 

 

 

170,288

 

Direct

 

 

284

 

 

 

120

 

 

 

268

 

 

 

672

 

 

 

22,789

 

 

 

23,461

 

Other

 

 

24

 

 

 

22

 

 

 

6

 

 

 

52

 

 

 

9,816

 

 

 

9,868

 

Total originated loans

 

$

4,103

 

 

$

1,717

 

 

$

6,552

 

 

$

12,372

 

 

$

1,793,539

 

 

$

1,805,911

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

0

 

 

$

0

 

 

$

27

 

 

$

27

 

 

$

45,072

 

 

$

45,099

 

Non-owner occupied

 

 

197

 

 

 

0

 

 

 

362

 

 

 

559

 

 

 

52,295

 

 

 

52,854

 

Farmland

 

 

0

 

 

 

0

 

 

 

566

 

 

 

566

 

 

 

25,513

 

 

 

26,079

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

12,868

 

 

 

12,868

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

19

 

 

 

390

 

 

 

477

 

 

 

886

 

 

 

17,772

 

 

 

18,658

 

Agricultural

 

 

4

 

 

 

0

 

 

 

4

 

 

 

8

 

 

 

4,841

 

 

 

4,849

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,954

 

 

 

821

 

 

 

5,597

 

 

 

8,372

 

 

 

80,745

 

 

 

89,117

 

Home equity lines of credit

 

 

23

 

 

 

0

 

 

 

186

 

 

 

209

 

 

 

17,175

 

 

 

17,384

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

 

20

 

 

 

49

 

 

 

64

 

 

 

133

 

 

 

4,995

 

 

 

5,128

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

97

 

 

 

97

 

Total acquired loans

 

$

2,217

 

 

$

1,260

 

 

$

7,283

 

 

$

10,760

 

 

$

261,373

 

 

$

272,133

 

Total loans

 

$

6,320

 

 

$

2,977

 

 

$

13,835

 

 

$

23,132

 

 

$

2,054,912

 

 

$

2,078,044

 

 

 

Troubled Debt Restructurings:

Total troubled debt restructurings were $3.9 million and $4.1 million at March 31, 2021 and December 31, 2020.  The Company has allocated $94 thousand and $81 thousand of specific reserves to loans whose terms have been modified in troubled debt restructurings at March 31, 2021 and December 31, 2020, respectively.  There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at March 31, 2021 and at December 31, 2020.

During the three month periods ended March 31, 2021 and 2020, the terms of certain loans were modified as troubled debt restructurings.  The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a deferral of principal, interest and/or escrow; or a legal concession.  During the three month period ended March 31, 2021, the terms of such loans included a reduction of the stated interest rate of the loan of 4.075% and an extension of the maturity date of 22 days.  During the same three month period in 2020, the terms of such loans included a deferral of principal and/or interest and an extension of the maturity date on these and other troubled debt restructurings in the range 168 to 180 months.

19


 

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month periods ended March 31, 2021 and 2020:

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Three Months Ended March 31, 2021

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

4

 

 

$

22

 

 

$

22

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

1

 

 

 

31

 

 

 

31

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

6

 

 

 

87

 

 

 

87

 

Total originated loans

 

 

11

 

 

$

140

 

 

$

140

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1

 

 

 

69

 

 

 

73

 

Total acquired loans

 

 

1

 

 

 

69

 

 

 

73

 

Total loans

 

 

12

 

 

$

209

 

 

$

213

 

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Three Months Ended March 31, 2020

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1

 

 

$

21

 

 

$

21

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

5

 

 

 

209

 

 

 

210

 

Home equity lines of credit

 

 

4

 

 

 

100

 

 

 

102

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

10

 

 

 

61

 

 

 

61

 

Other

 

 

1

 

 

 

15

 

 

 

15

 

Total originated loans

 

 

21

 

 

$

406

 

 

$

409

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1

 

 

 

68

 

 

 

68

 

Total acquired loans

 

 

1

 

 

$

68

 

 

$

68

 

Total loans

 

 

22

 

 

$

474

 

 

$

477

 

 

 

There were $20 thousand and $5 thousand in charge offs and a $20 thousand and $5 thousand increase to the provision for credit losses during the three month periods ended March 31, 2021 and 2020, respectively, as a result of outstanding troubled debt restructurings.    

There was one  residential real estate loan for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month period ended March 31, 2021.  The loan was not past due at March 31, 2021.  There was no provision recorded as a result of the defaults during 2021.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

20


 

There were two commercial farmland loans and one commercial loan for which there was a payment default within twelve months following the modification of the troubled debt restructuring during the three month period ended March 31, 2020. There were two commercial farmland and one commercial loan that were past due at March 31, 2020.    There was no provision recorded as a result of the defaults during 2020.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Farmers is offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic.  The following table reports the number and amount of payment deferrals by loan type as of dates listed:  

 

 

 

 

June 30, 2020

 

 

September 30, 2020

 

 

December 31, 2020

 

 

March 31, 2021

 

 

 

Outstanding Balance

 

 

Number of loans

 

 

Outstanding Balance

 

 

Number of loans

 

 

Outstanding Balance

 

 

Number of loans

 

 

Outstanding Balance

 

 

Number of loans

 

Commercial real estate

 

$

43,954

 

 

 

44

 

 

$

155

 

 

 

1

 

 

$

19,027

 

 

 

6

 

 

$

16,584

 

 

 

5

 

Commercial

 

 

8,515

 

 

 

69

 

 

 

0

 

 

 

0

 

 

 

1,424

 

 

 

2

 

 

 

0

 

 

 

0

 

Agricultural

 

 

8,340

 

 

 

22

 

 

 

469

 

 

 

2

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Residential real estate

 

 

3,785

 

 

 

37

 

 

 

222

 

 

 

1

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Consumer

 

 

1,858

 

 

 

100

 

 

 

2

 

 

 

1

 

 

 

2

 

 

 

1

 

 

 

0

 

 

 

0

 

Total

 

$

66,452

 

 

 

272

 

 

$

848

 

 

 

5

 

 

$

20,453

 

 

 

9

 

 

$

16,584

 

 

 

5

 

 

 

The Company offered three month deferrals upon request by the borrowers. For those borrowers in industries that were greatly impacted by COVID-19, additional deferrals were considered and granted beyond the initial three month period.  The range of deferred months for subsequent requests were three to nine months.  The decline in deferred loans and balances was due to borrowers not requesting additional deferments and that most continued to pay under the original terms of their loan.

 

 

Farmers is also a preferred SBA lender and dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the new Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, so they could obtain SBA approval and receive funding as quickly as possible. During the period of the PPP program, the Company facilitated PPP assistance to 1,714 business customers totaling $199.8 million.  The Company, on behalf of its customers, began processing borrower applications for PPP forgiveness at the beginning of September 2020.  The SBA has up to ninety days to review an application for PPP forgiveness and provide a decision at the end of that review.  Once forgiveness of the PPP loan has been communicated and payment is received from the SBA, the Company will record the cash received from the SBA, pay-off the loans based on the amount of forgiveness provided and accelerate the amount of net deferred loan fees/costs recognized for the portion of the PPP loans that are forgiven.  At March 31, 2021, the Company had received payments from the SBA for forgiveness of loans totaling $137.2 million, or approximately 68.7% of the first round of total PPP loans.  The Company has funded $75.1 million in new loans for the second round of PPP loan funding.   

 

 

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company establishes a risk rating at origination for all commercial loan and commercial real estate relationships.  For relationships over $750 thousand, management monitors the loans on an ongoing basis for any changes in the borrower’s ability to service their debt.  Management also affirms the risk ratings for the loans in their respective portfolios on an annual basis.  The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

21


 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  Substandard loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of March 31, 2021 and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

203,634

 

 

$

5,077

 

 

$

1,347

 

 

$

210,058

 

Non-owner occupied

 

 

294,564

 

 

 

11,177

 

 

 

7,201

 

 

 

312,942

 

Farmland

 

 

153,501

 

 

 

2,462

 

 

 

358

 

 

 

156,321

 

Other

 

 

73,234

 

 

 

0

 

 

 

156

 

 

 

73,390

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

376,736

 

 

 

2,323

 

 

 

8,379

 

 

 

387,438

 

Agricultural

 

 

41,675

 

 

 

313

 

 

 

222

 

 

 

42,210

 

Total originated loans

 

$

1,143,344

 

 

$

21,352

 

 

$

17,663

 

 

$

1,182,359

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

43,007

 

 

$

81

 

 

$

864

 

 

$

43,952

 

Non-owner occupied

 

 

41,672

 

 

 

3,576

 

 

 

3,277

 

 

 

48,525

 

Farmland

 

 

23,505

 

 

 

100

 

 

 

1,041

 

 

 

24,646

 

Other

 

 

12,578

 

 

 

0

 

 

 

0

 

 

 

12,578

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

13,804

 

 

 

0

 

 

 

1,219

 

 

 

15,023

 

Agricultural

 

 

3,732

 

 

 

19

 

 

 

47

 

 

 

3,798

 

Total acquired loans

 

$

138,298

 

 

$

3,776

 

 

$

6,448

 

 

$

148,522

 

Total loans

 

$

1,281,642

 

 

$

25,128

 

 

$

24,111

 

 

$

1,330,881

 

22


 

 

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

208,289

 

 

$

5,121

 

 

$

1,385

 

 

$

214,795

 

Non-owner occupied

 

 

290,773

 

 

 

11,240

 

 

 

7,203

 

 

 

309,216

 

Farmland

 

 

153,225

 

 

 

2,464

 

 

 

364

 

 

 

156,053

 

Other

 

 

77,432

 

 

 

387

 

 

 

167

 

 

 

77,986

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

372,083

 

 

 

1,522

 

 

 

8,740

 

 

 

382,345

 

Agricultural

 

 

44,527

 

 

 

320

 

 

 

213

 

 

 

45,060

 

Total originated loans

 

$

1,146,329

 

 

$

21,054

 

 

$

18,072

 

 

$

1,185,455

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

44,031

 

 

$

87

 

 

$

981

 

 

$

45,099

 

Non-owner occupied

 

 

50,053

 

 

 

49

 

 

 

2,752

 

 

 

52,854

 

Farmland

 

 

24,637

 

 

 

100

 

 

 

1,342

 

 

 

26,079

 

Other

 

 

12,868

 

 

 

0

 

 

 

0

 

 

 

12,868

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

16,246

 

 

 

0

 

 

 

2,412

 

 

 

18,658

 

Agricultural

 

 

4,481

 

 

 

303

 

 

 

65

 

 

 

4,849

 

Total acquired loans

 

$

152,316

 

 

$

539

 

 

$

7,552

 

 

$

160,407

 

Total loans

 

$

1,298,645

 

 

$

21,593

 

 

$

25,624

 

 

$

1,345,862

 

 

The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses.  For residential, consumer indirect and direct loan classes, the Company evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  In the 1-4 family residential real estate portfolio at March 31, 2021, other real estate owned and foreclosure properties were $30 thousand and $491 thousand, respectively.  At December 31, 2020, other real estate owned and foreclosure properties were $0 and $699 thousand, respectively.

The following tables present the recorded investment in residential, consumer indirect and direct auto loans based on payment activity as of March 31, 2021 and December 31, 2020.  Nonperforming loans are loans past due 90 days or more and still accruing interest and nonaccrual loans.

 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family

Residential

 

 

Home

Equity Lines

of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

317,374

 

 

$

90,447

 

 

$

162,873

 

 

$

21,196

 

 

$

9,256

 

Nonperforming

 

 

916

 

 

 

590

 

 

 

554

 

 

 

232

 

 

 

3

 

Total originated loans

 

$

318,290

 

 

$

91,037

 

 

$

163,427

 

 

$

21,428

 

 

$

9,259

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

76,828

 

 

$

16,295

 

 

$

0

 

 

$

4,619

 

 

$

118

 

Nonperforming

 

 

4,999

 

 

 

179

 

 

 

0

 

 

 

44

 

 

 

0

 

Total acquired loans

 

 

81,827

 

 

 

16,474

 

 

 

0

 

 

 

4,663

 

 

 

118

 

Total loans

 

$

400,117

 

 

$

107,511

 

 

$

163,427

 

 

$

26,091

 

 

$

9,377

 

23


 

 

 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family

Residential

 

 

Home

Equity Lines

of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Originated loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

322,771

 

 

$

92,376

 

 

$

169,576

 

 

$

23,193

 

 

$

9,862

 

Nonperforming

 

 

1,089

 

 

 

603

 

 

 

712

 

 

 

268

 

 

 

6

 

Total originated loans

 

$

323,860

 

 

$

92,979

 

 

$

170,288

 

 

$

23,461

 

 

$

9,868

 

Acquired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

83,520

 

 

$

17,198

 

 

$

0

 

 

$

5,064

 

 

$

97

 

Nonperforming

 

 

5,597

 

 

 

186

 

 

 

0

 

 

 

64

 

 

 

0

 

Total acquired loans

 

 

89,117

 

 

 

17,384

 

 

 

0

 

 

 

5,128

 

 

 

97

 

Total loans

 

$

412,977

 

 

$

110,363

 

 

$

170,288

 

 

$

28,589

 

 

$

9,965

 

 

 

24


 

 

The following table presents total loans by risk categories and year of origination.

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2021

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving Loans

 

 

Total

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

18,911

 

 

$

113,455

 

 

$

135,474

 

 

$

117,019

 

 

$

73,247

 

 

$

195,638

 

 

$

14,944

 

 

$

668,688

 

Special mention

 

 

0

 

 

 

0

 

 

 

9,166

 

 

 

1,594

 

 

 

2,736

 

 

 

6,416

 

 

 

0

 

 

 

19,912

 

Substandard

 

 

0

 

 

 

356

 

 

 

2,281

 

 

 

511

 

 

 

93

 

 

 

9,483

 

 

 

121

 

 

 

12,845

 

Total commercial real estate loans

 

$

18,911

 

 

$

113,811

 

 

$

146,921

 

 

$

119,124

 

 

$

76,076

 

 

$

211,537

 

 

$

15,065

 

 

$

701,445

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

86,561

 

 

$

142,031

 

 

$

34,218

 

 

$

36,782

 

 

$

15,206

 

 

$

24,738

 

 

$

51,004

 

 

$

390,540

 

Special mention

 

 

260

 

 

 

317

 

 

 

 

 

 

 

866

 

 

 

1

 

 

 

49

 

 

 

830

 

 

 

2,323

 

Substandard

 

 

144

 

 

 

2,380

 

 

 

374

 

 

 

299

 

 

 

911

 

 

 

1,102

 

 

 

4,388

 

 

 

9,598

 

Total commercial loans

 

$

86,965

 

 

$

144,728

 

 

$

34,592

 

 

$

37,947

 

 

$

16,118

 

 

$

25,889

 

 

$

56,222

 

 

$

402,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

8,999

 

 

$

53,165

 

 

$

35,876

 

 

$

39,025

 

 

$

24,108

 

 

$

46,520

 

 

$

14,721

 

 

$

222,414

 

Special mention

 

 

0

 

 

 

247

 

 

 

36

 

 

 

0

 

 

 

2,105

 

 

 

387

 

 

 

118

 

 

 

2,893

 

Substandard

 

 

360

 

 

 

78

 

 

 

227

 

 

 

0

 

 

 

0

 

 

 

1,003

 

 

 

0

 

 

 

1,668

 

Total agricultural loans

 

$

9,359

 

 

$

53,490

 

 

$

36,139

 

 

$

39,025

 

 

$

26,213

 

 

$

47,910

 

 

$

14,839

 

 

$

226,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

13,348

 

 

$

84,993

 

 

$

46,301

 

 

$

35,298

 

 

$

51,990

 

 

$

152,073

 

 

$

2,887

 

 

$

386,890

 

Special mention

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

738

 

 

 

0

 

 

 

738

 

Substandard

 

 

0

 

 

 

0

 

 

 

43

 

 

 

86

 

 

 

1,053

 

 

 

11,307

 

 

 

0

 

 

 

12,489

 

Total residential real estate loans

 

$

13,348

 

 

$

84,993

 

 

$

46,344

 

 

$

35,384

 

 

$

53,043

 

 

$

164,118

 

 

$

2,887

 

 

$

400,117

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

103

 

 

$

1,529

 

 

$

104,043

 

 

$

105,675

 

Special mention

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

48

 

 

 

48

 

Substandard

 

 

0

 

 

 

0

 

 

 

0

 

 

 

76

 

 

 

82

 

 

 

1,453

 

 

 

177

 

 

 

1,788

 

Total home equity lines of credit

 

$

0

 

 

$

0

 

 

$

0

 

 

$

76

 

 

$

185

 

 

$

2,982

 

 

$

104,268

 

 

$

107,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

11,584

 

 

$

59,645

 

 

$

49,183

 

 

$

31,910

 

 

$

16,010

 

 

$

22,837

 

 

$

5,823

 

 

$

196,992

 

Special mention

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Substandard

 

 

0

 

 

 

230

 

 

 

296

 

 

 

356

 

 

 

268

 

 

 

753

 

 

 

0

 

 

 

1,903

 

Total consumer loans

 

$

11,584

 

 

$

59,875

 

 

$

49,479

 

 

$

32,266

 

 

$

16,278

 

 

$

23,590

 

 

$

5,823

 

 

$

198,895

 

 

 

25


 

 

Allowance for Credit Losses

 

The Company adopted ASU 2016-13 to calculate the Allowance for credit losses (“ACL”) which requires projecting credit losses over the lifetime of the credits.  The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans.  Although the Company has a diversified loan portfolio, the credit risk in the loan portfolio is largely influenced by general economic conditions and trends of the counties and markets in which the debtors operate, and the resulting impact on the operations of borrowers or on the value of any underlying collateral.

 

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s loan portfolio segments.  These segments are disaggregated into the loan pools for monitoring.  A model of risk characteristics, such as loss history and delinquency experience, trends in past due and non-performing loans, as well as existing economic conditions and forecasts used to determine credit loss assumptions.

 

The Company uses two methodologies to analyze loan pools.  The cohort method (“cohort”) and the probability of default/loss given default (“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 aren’t 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.

The probability of default (“PD”) portion of PD/LGD is defined by the Company as 90 days past due, placed on non-accrual, becomes a troubled debt restructuring or is partially or wholly charged-off.  Typically a one-year time period is used to asses PD.  PD can be measured and applied using various risk criteria.  Risk rating is one common way to apply PDs.  Loss given default (“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.

 

Revenue from Contracts with Customers:

 

All material revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income.  The following table presents the Company’s noninterest income by revenue stream and reportable segment, net of eliminations, for the three months ended March 31, 2021 and 2020.

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Three Months Ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

808

 

 

$

808

 

Debit card and EFT fees

 

 

0

 

 

 

1,084

 

 

 

1,084

 

Trust fees

 

 

2,236

 

 

 

0

 

 

 

2,236

 

Insurance agency commissions

 

 

0

 

 

 

1,001

 

 

 

1,001

 

Retirement plan consulting fees

 

 

320

 

 

 

0

 

 

 

320

 

Investment commissions

 

 

0

 

 

 

504

 

 

 

504

 

Other (outside the scope of ASC 606)

 

 

0

 

 

 

4,630

 

 

 

4,630

 

Total noninterest income

 

$

2,556

 

 

$

8,027

 

 

$

10,583

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

1,095

 

 

$

1,095

 

Debit card and EFT fees

 

 

0

 

 

 

851

 

 

 

851

 

Trust fees

 

 

1,857

 

 

 

0

 

 

 

1,857

 

Insurance agency commissions

 

 

0

 

 

 

883

 

 

 

883

 

Retirement plan consulting fees

 

 

380

 

 

 

0

 

 

 

380

 

Investment commissions

 

 

0

 

 

 

423

 

 

 

423

 

Other (outside the scope of ASC 606)

 

 

0

 

 

 

2,226

 

 

 

2,226

 

Total noninterest income

 

$

2,237

 

 

$

5,478

 

 

$

7,715

 

26


 

 

 

 

A description of the Company’s revenue streams under ASC 606 follows:

 

Service charges on deposit accounts – The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Management reviewed the deposit account agreements, and determined that the agreements can be terminated at any time by either the Bank or the account holder.  Transaction fees, such as balance transfers, wires and overdraft charges are settled the day the performance obligation is satisfied.  The Bank’s monthly service charges and maintenance fees are for services provided to the customer on a monthly basis are considered a series of services that have the same pattern of transfer each month.  The review of service charges assessed on deposit accounts, included the amount of variable consideration that is a part of the monthly charges.  It was found that the waiver of service charges due to insufficient funds and dormant account fees is immaterial and would not require a change in the accounting treatment for these fees under the new revenue standards.

Debit Card Interchange Fees – Customers and the Bank have an account agreement and maintain deposit balances with the Bank.  Customers use a bank issued debit card to purchase goods and services, and the Bank earns interchange fees on those transactions, typically a percentage of the sale amount of the transaction.  The Bank records the amount due when it receives the settlement from the payment network.  Payments from the payment network are received and recorded into income on a daily basis.  There are no contingent debit card interchange fees recorded by the Company that could be subject to a clawback in future periods.

Trust fees – Services provided to Trust customers are a series of distinct services that have the same pattern of transfer each month.  Fees for trust accounts are billed and drafted from trust accounts monthly.  The Company records these fees on the income statement on a monthly basis.  Fees are assessed based on the total investable assets of the customer’s trust account.  A signed contract between the Company and the customer is maintained for all customer trust accounts with payment terms identified.  It is probable that the fees will be collectible as funds being managed are accessible by the asset manager.  Past history of trust fee income recorded by the Company indicates that it is highly unlikely that a significant reversal could occur.  There are no contingent incentive fees recorded by the Company that could be subject to a clawback in future periods.

Insurance Agency Commissions – Insurance agency commissions are received from insurance carriers for the agency’s share of commissions from customer premium payments.  These commissions are recorded into income when checks are received from the insurance carriers, and there is no contingent portion associated with these commission checks.  There may be a short time-lag in recording revenue when cash is received instead of recording the revenue when the policy is signed by the customer, but the time lag is insignificant and does not impact the revenue recognition process.

Insurance also receives incentive checks from the insurance carriers for achieving specified levels of production with particular carriers.  These amounts are recorded into income when a check is received, and there are no contingent amounts associated with these payments that may be clawed back by the carrier in the future.  Similar to the monthly commissions explained in the preceding paragraph, there may be a short time-lag in recording incentive revenue on a cash basis as opposed to estimating the amount of incentive revenue expected to be earned, this does not materially impact the recognition of Insurance revenue.  If there were any amounts that would need to be refunded for one specific Insurance customer, management believes the reversal would not be significant.

Other potential situations surrounding the recognition of Insurance revenue include the estimating potential refunds due to the likely cancellation of a percentage of customers cancelling their policies and recording revenue at the time of policy renewals.  Management concluded that since Insurance agency commissions represent only 2.6% of the Company’s total revenue, adjusting the current practice of recording insurance revenue for these situations would not have a material impact on the reporting of total revenue.  

Retirement Plan Consulting Fees – Revenue is recognized based on the level of work performed for the client.  Any payments that are received for work to be performed in the future are recorded in a deferred revenue account, and recorded into income when the fees are earned.  Retirement plan consulting fees represent only 0.8% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for one particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.  

Investment Commissions – Investment commissions are earned through the sales of non-deposit investment products to customers of the Company.  The sales are conducted through a third-party broker-dealer.  When the commissions are received and recorded into income on the Bank’s income statement, there is no contingent portion that may need to be refunded back to Cetera.  Investment commissions represent only 1.3% of the Company’s total revenue, and therefore management has concluded that any adjustment of revenue for a particular customer for a refund or any other reason would be insignificant and would not materially impact the Company’s total revenue.  

27


 

Other – Income items included in “Other” are Bank owned life insurance income, security gains, net gains on the sale of loans and other operating income.  Any amounts within the scope of ASC 606 are deemed immaterial.

 

Fair Value:

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The Company uses a third party service to estimate fair value on available for sale securities on a monthly basis.  The Company’s service provider is considered a leading evaluation pricing service for U.S. domestic fixed income securities and complies fully with ASU 2016-01’s exit pricing requirements.  They subscribe to multiple third-party pricing vendors, and supplement that information with matrix pricing methods.  The fair values for investment securities, which consist of equity securities that are recorded at fair market value to comply with ASU 2016-01, are determined by quoted market prices in active markets, if available (Level 1).  The equity securities change in fair market value is recorded in the income statements.  For securities where quoted prices are not available, fair values are calculated based on quoted prices for similar assets in active markets, quoted prices for similar assets in markets that are not active or inputs other than quoted prices, which provide a reasonable basis for fair value determination.  Such inputs may include interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates.  Inputs used are derived principally from observable market data (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  The fair values of Level 3 investment securities are determined by using unobservable inputs to measure fair value of assets for which there is little, if any market activity at the measurement date, using reasonable inputs and assumptions based on the best information at the time, to the extent that inputs are available without undue cost and effort.  For the period ended March 31, 2021 and for the year ended December 31, 2020, the fair value of Level 3 investment securities was immaterial.

Derivative Instruments: The fair values of derivative instruments are based on valuation models using observable market data as of the measurement date (Level 2).

Collateral Dependent Loans: At the time loans are considered impaired, collateral dependent impaired loans are valued at the lower of cost or fair value and non-collateral dependent loans are valued based on discounted cash flows.  Impaired loans carried at fair value generally receive specific allocations of the allowance for credit losses in 2021 and allowance for loan losses in prior periods.  For collateral dependent loans, fair value is commonly based on recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair values are commonly based on recent real estate appraisals.  These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

28


 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial and commercial real estate properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.  On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what adjustments should be made to appraisals to arrive at fair value.

Assets measured at fair value on a recurring basis are summarized below:

 

 

 

Fair Value Measurements at March 31, 2021 Using:

 

(In Thousands of Dollars)

 

Carrying

Value

 

 

Quoted Prices in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

17,065

 

 

$

0

 

 

$

17,065

 

 

$

0

 

State and political subdivisions

 

 

460,417

 

 

 

0

 

 

 

460,417

 

 

 

0

 

Corporate bonds

 

 

3,737

 

 

 

0

 

 

 

3,737

 

 

 

0

 

Mortgage-backed securities-residential

 

 

300,522

 

 

 

0

 

 

 

300,518

 

 

 

4

 

Collateralized mortgage obligations

 

 

15,935

 

 

 

0

 

 

 

15,935

 

 

 

0

 

Small Business Administration

 

 

5,190

 

 

 

0

 

 

 

5,190

 

 

 

0

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities at fair value

 

 

648

 

 

 

648

 

 

 

0

 

 

 

0

 

Other investments measured at net asset value

 

 

6,254

 

 

n/a

 

 

n/a

 

 

n/a

 

Total investment securities

 

$

809,768

 

 

$

648

 

 

$

802,862

 

 

$

4

 

Loan yield maintenance provisions

 

$

2,721

 

 

$

0

 

 

$

2,721

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

2,721

 

 

$

0

 

 

$

2,721

 

 

$

0

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

(In Thousands of Dollars)

 

Carrying

Value

 

 

Quoted Prices  in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment securities available-for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

11,845

 

 

$

0

 

 

$

11,845

 

 

$

0

 

State and political subdivisions

 

 

366,306

 

 

 

0

 

 

 

366,306

 

 

 

0

 

Corporate bonds

 

 

3,712

 

 

 

0

 

 

 

3,712

 

 

 

0

 

Mortgage-backed securities-residential

 

 

161,782

 

 

 

0

 

 

 

161,778

 

 

 

4

 

Collateralized mortgage obligations

 

 

26,393

 

 

 

0

 

 

 

26,393

 

 

 

0

 

Small Business Administration

 

 

5,562

 

 

 

0

 

 

 

5,562

 

 

 

0

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities at fair value

 

 

538

 

 

 

538

 

 

 

0

 

 

 

0

 

Other investments measured at net asset value

 

 

6,343

 

 

n/a

 

 

n/a

 

 

n/a

 

Total investment securities

 

$

582,481

 

 

$

538

 

 

$

575,596

 

 

$

4

 

Loan yield maintenance provisions

 

$

4,221

 

 

$

0

 

 

$

4,221

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

4,221

 

 

$

0

 

 

$

4,221

 

 

$

0

 

 

There were no significant transfers between Level 1 and Level 2 during the three month period ended March 31, 2021 and 2020.  For additional information related to yield maintenance provisions and interest rate swaps see Interest – Rate Swaps note.

 

29


 

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

 

 

Investment Securities Available-for-sale (Level 3)

 

 

 

Three Months ended

March 31,

 

(In Thousands of Dollars)

 

2021

 

 

2020

 

Beginning Balance

 

$

4

 

 

$

5

 

Transfers from level 2

 

 

0

 

 

 

0

 

Repayments, calls and maturities

 

 

0

 

 

 

0

 

Ending Balance

 

$

4

 

 

$

5

 

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

 

 

Fair Value Measurements at March 31, 2021 Using:

 

(In Thousands of Dollars)

 

Carrying

Value

 

 

Quoted Prices  in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateral dependent loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,994

 

 

$

0

 

 

$

0

 

 

$

1,994

 

1–4 family residential

 

 

114

 

 

 

0

 

 

 

0

 

 

 

114

 

Home equity lines of credit

 

 

3

 

 

 

0

 

 

 

0

 

 

 

3

 

Consumer indirect

 

 

45

 

 

 

0

 

 

 

0

 

 

 

45

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

(In Thousands of Dollars)

 

Carrying

Value

 

 

Quoted Prices in

Active Markets

for Identical Assets

(Level 1)

 

 

Significant Other

Observable Inputs

(Level 2)

 

 

Significant

Unobservable Inputs

(Level 3)

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,770

 

 

$

0

 

 

$

0

 

 

$

1,770

 

1–4 family residential

 

 

82

 

 

 

0

 

 

 

0

 

 

 

82

 

Consumer

 

 

36

 

 

 

0

 

 

 

0

 

 

 

36

 

 

Collateral dependent loans were individually evaluated under ASC 326 for the period ended March 31, 2021, while impaired loans from the period ended December 31, 2020 were individually evaluated under ASC 310.  Collateral dependent loans had a principal balance of $2.3 million with a valuation allowance of $163 thousand at March 31, 2021.  Impaired loans that were measured for impairment using the fair value of the collateral had a principal balance of $2.3 million, with a valuation allowance of $368 thousand at December 31, 2020.  Excluded from the above tables at March 31, 2021 and December 31, 2020, are $566 thousand and $513 thousand of loans classified as troubled debt restructurings and measured using the present value of cash flows, which is not considered an exit price.

Collateral dependent commercial real estate loans, both owner-occupied and non-owner occupied are valued by independent external appraisals.  These external appraisals are prepared using the sales comparison approach and income approach valuation techniques.  Management makes subsequent unobservable adjustments to the collateral dependent loan appraisals.  Collateral dependent loans other than commercial real estate and other real estate owned are not considered material.

30


 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at the periods ended March 31, 2021 and December 31, 2020:

 

March 31, 2021

Fair value

 

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Collateral dependent loans

 

 

 

 

 

 

 

 

 

Commercial

$

1,994

 

 

Sales Comparison

 

Adjustment for differences between comparable sales

 

(24.07%) - 21.19%

(0.34%)

Residential

 

117

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(40.00%) - 47.15%

(17.77%)

Consumer

 

45

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(10.39%) - 10.39%

0.00%

 

December 31, 2020

Fair value

 

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Impaired loans

 

 

 

 

 

 

 

 

 

Commercial

$

1,770

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(24.01%) - 17.93% (0.48%)

Residential

 

82

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(40.00%) - 47.15%

(17.77%)

Consumer

 

36

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(23.60%) - 23.60%

(0.00%)

 

The carrying amounts and estimated fair values of financial instruments not previously disclosed at March 31, 2021 and December 31, 2020 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2021 Using:

 

(In Thousands of Dollars)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

326,385

 

 

$

23,165

 

 

$

303,220

 

 

$

0

 

 

$

326,385

 

Restricted stock

 

 

14,416

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

3,993

 

 

 

0

 

 

 

4,113

 

 

 

0

 

 

 

4,113

 

Loans, net

 

 

2,012,469

 

 

 

0

 

 

 

0

 

 

 

1,990,092

 

 

 

1,990,092

 

Accrued interest receivable

 

 

9,600

 

 

 

0

 

 

 

3,716

 

 

 

5,884

 

 

 

9,600

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,833,054

 

 

 

2,267,188

 

 

 

451,042

 

 

 

0

 

 

 

2,718,230

 

Short-term borrowings

 

 

5,210

 

 

 

0

 

 

 

5,210

 

 

 

0

 

 

 

5,210

 

Long-term borrowings

 

 

74,473

 

 

 

0

 

 

 

73,730

 

 

 

0

 

 

 

73,730

 

Accrued interest payable

 

 

616

 

 

 

39

 

 

 

577

 

 

 

0

 

 

 

616

 

31


 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2020 Using:

 

(In Thousands of Dollars)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

254,621

 

 

$

20,503

 

 

$

234,118

 

 

$

0

 

 

$

254,621

 

Restricted stock

 

 

14,647

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

4,766

 

 

 

0

 

 

 

4,909

 

 

 

0

 

 

 

4,909

 

Loans, net

 

 

2,055,900

 

 

 

0

 

 

 

0

 

 

 

2,036,872

 

 

 

2,036,872

 

Accrued interest receivable

 

 

9,880

 

 

 

0

 

 

 

3,297

 

 

 

6,583

 

 

 

9,880

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,610,878

 

 

 

2,097,732

 

 

 

487,105

 

 

 

0

 

 

 

2,606,872

 

Short-term borrowings

 

 

2,521

 

 

 

0

 

 

 

2,521

 

 

 

0

 

 

 

2,521

 

Long-term borrowings

 

 

76,385

 

 

 

0

 

 

 

77,189

 

 

 

0

 

 

 

77,189

 

Accrued interest payable

 

 

690

 

 

 

36

 

 

 

654

 

 

 

0

 

 

 

690

 

 

The methods and assumptions used to estimate fair value, not previously described, are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2.  The Company has determined that cash on hand and non-interest bearing due from bank accounts are Level 1 whereas interest bearing federal funds sold and other are Level 2.

Restricted Stock: It is not practical to determine the fair value of restricted stock due to restrictions placed on its transferability.

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows. The Company uses a third party firm that uses cash flow analysis and current market interest rates along with adjustments for credit, liquidity and option risk to conform to the ASU 2016-01 exit price requirement.  Loans in the tables above consist of impaired credits held for investment. In accordance with ASC 326, impairment was measured based on the fair value of collateral less estimated selling costs for collateral dependent loans or the cash flow method for noncollateral dependent loans. Fair value for collateral dependent impaired loans is based upon appraised values adjusted for trends observed in the market. A valuation allowance was recorded for the excess of the loan’s recorded investment over the amounts determined by the collateral value method. This valuation is a component of the allowance for credit losses. The Company considers these fair values level 3.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest receivable and payable approximate fair value resulting in a Level 1, Level 2 or Level 3 classification.  The classification is the result of the association with securities, loans and deposits.

Deposits: The fair values disclosed for demand deposits – interest and non-interest checking, passbook savings, and money market accounts – are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification.  The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification.  Fair value for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-term Borrowings: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Off-balance Sheet Instruments: The fair value of commitments is not considered material.

 

 

32


 

 

Goodwill and Intangible Assets:

 

Goodwill associated with the Company’s purchase of Maple Leaf in January 2020 and other past acquisitions totaled $45.8 million at March 31, 2021 and December 31, 2020.  Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Management performs goodwill impairment testing on an annual basis as of September 30.  The fair value of the reporting units is determined using a combination of a discounted cash flow method and a guideline public company method.  

Acquired Intangible Assets

Acquired intangible assets were as follows:

 

 

March 31, 2021

 

 

December 31, 2020

 

(In Thousands of Dollars)

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship intangibles

$

7,210

 

 

$

(6,399

)

 

$

7,210

 

 

$

(6,318

)

Non-compete contracts

 

430

 

 

 

(388

)

 

 

430

 

 

 

(388

)

Trade name

 

520

 

 

 

(330

)

 

 

520

 

 

 

(320

)

Core deposit intangible

 

6,979

 

 

 

(4,496

)

 

 

6,979

 

 

 

(4,271

)

Total

$

15,139

 

 

$

(11,613

)

 

$

15,139

 

 

$

(11,297

)

 

Aggregate amortization expense was $316 thousand for the three month period ended March 31, 2021 and $332 thousand for the three month period ended March 31, 2020.

Estimated amortization expense for each of the next five periods and thereafter:

 

2021 (9 months)

$

948

 

2022

 

1,090

 

2023

 

617

 

2024

 

314

 

2025

 

253

 

Thereafter

 

304

 

Total

$

3,526

 

 

Leases:

 

The Company has operating leases for branch office locations, vehicles and certain office equipment such as printers, copiers and faxes. The leases have remaining lease terms of 5 months to 8.83 years, some of which include options to extend the lease for up to 10 years and some of which include options to terminate the leases within 5 months.

The right of use asset and lease liability were $4.6 and $4.8 million as of March 31, 2021 and $4.9 million and $5.0 million at March 31, 2020.  The right of use asset and lease liability were $4.8 million and $5.0 million at December 31, 2020.

Lease payments made for the three month period ended March 31, 2021 were $202 thousand, while lease payments made for the three month period ended March 31, 2020 were $195 thousand.  Interest expense and amortization expense on finance leases for the three month period ended March 31, 2021 was $36 thousand and $121 thousand.  Interest expense and amortization expense on finance leases for the three month period ended March 31, 2020 was $23 thousand and $107 thousand.  The weighted-average remaining lease term for all leases was 4.6 years as of March 31, 2021 and the weighted-average discount rate was 3.0%.

 

33


 

 

Maturities of lease liabilities are as follows as of March 31, 2021:

 

2021 (9 months)

 

$

598

 

2022

 

 

624

 

2023

 

 

568

 

2024

 

 

398

 

2025

 

 

410

 

Thereafter

 

 

3,177

 

Total Payments

 

 

5,775

 

Less: Imputed Interest

 

 

(971

)

Total

 

$

4,804

 

 

Interest-Rate Swaps:

The Company uses a program that utilizes interest-rate swaps as part of its asset/liability management strategy.  The interest-rate swaps are used to help manage the Company’s interest rate risk position and not as derivatives for trading purposes.  The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.

The objective of the interest-rate swaps is to protect the related fixed rate commercial real estate loans from changes in fair value due to changes in interest rates.  The Company has a program whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision, which will be invoked in the event of prepayment of the loan, and is expected to exactly offset the fair value of unwinding the swap.  The yield maintenance provision represents an embedded derivative which is bifurcated from the host loan contract and, as such, the swaps and embedded derivatives are not designated as hedges.  Accordingly, both instruments are carried at fair value and changes in fair value are reported in current period earnings.

Summary information about these interest-rate swaps at periods ended March 31, 2021 and December 31, 2020 is as follows:

 

 

March 31, 2021

 

 

December 31, 2020

 

Notional amounts (In thousands)

$

40,615

 

 

$

41,315

 

Weighted average pay rate on interest-rate swaps

 

4.63

%

 

 

4.63

%

Weighted average receive rate on interest-rate swaps

 

2.31

%

 

 

2.36

%

Weighted average maturity (years)

 

4.5

 

 

 

4.3

 

Fair value of interest-rate swaps (In thousands)

$

(2,721

)

 

$

(4,221

)

Fair value of loan yield maintenance provisions (In thousands)

$

2,721

 

 

$

4,221

 

 

The fair value of the yield maintenance provisions and interest-rate swaps is recorded in other assets and other liabilities, respectively, in the consolidated balance sheets.  Changes in the fair value of the yield maintenance provisions and interest-rate swaps are reported in earnings, as other noninterest income in the consolidated statements of income.  For the three month periods ended March 31, 2021 and 2020 there were no net gains or losses recognized in earnings.

 

 

34


 

 

Earnings Per Share:

The computation of basic and diluted earnings per share is shown in the following table:

 

Three Months Ended

March 31,

 

 

2021

 

 

2020

 

Basic EPS

 

 

 

 

 

 

 

Net income (In thousands)

$

14,556

 

 

$

8,639

 

Weighted average shares outstanding

 

28,215,772

 

 

 

28,535,371

 

Basic earnings per share

$

0.52

 

 

$

0.30

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Net income (In thousands)

$

14,556

 

 

$

8,639

 

Weighted average shares outstanding for basic earnings per share

 

28,215,772

 

 

 

28,535,371

 

Dilutive effect of restricted stock awards

 

120,367

 

 

 

174,632

 

Weighted average shares for diluted earnings per share

 

28,336,139

 

 

 

28,710,003

 

Diluted earnings per share

$

0.51

 

 

$

0.30

 

 

There were no restricted stock awards that were considered anti-dilutive for the three month periods ended March 31, 2021 and 2020.

 

 

Stock Based Compensation:

 

During 2017, the Company, with the approval of shareholders, created the 2017 Equity Incentive Plan (the “2017 Plan”).  The 2017 Plan permits the award of up to 800 thousand shares to the Company’s directors and employees to attract and retain exceptional personnel, motivate performance and most importantly to help align the interests of the Company’s executives with those of the Company’s shareholders.  There were 19,062 service time based share awards and 52,249 performance based share awards granted under the 2017 Plan during the three month period ended March 31, 2021, as shown in the table below.  The actual number of performance based shares issued will depend on the relative performance of the Company’s average return on equity compared to a group of peer companies over a three year vesting period, ending December 31, 2023.  As of March 31, 2021, 325,004 shares are still available to be awarded from the 2017 Plan.    

The restricted stock awards were granted with a fair value price equal to the market price of the Company’s common stock at the date of the grant.  Expense recognized was $330 thousand for the three month period ended March 31, 2021.  Expense recognized was $337 thousand for the three month period ended March 31, 2020.  As of March 31, 2021, there was $1.9 million of total unrecognized compensation expense related to the nonvested shares granted under the Plans.  The remaining cost is expected to be recognized over 2.9 years.  

The following is the activity under the Plans during the three month period ended March 31, 2021.

 

 

Three Months Ended March 31, 2021

 

 

Maximum

Awarded

Service

Units

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Maximum

Awarded

Performance

Units

 

 

Weighted

Average

Grant Date

Fair Value

 

Beginning balance - non-vested shares

 

67,765

 

 

$

14.32

 

 

 

153,070

 

 

$

14.46

 

Granted

 

19,062

 

 

 

14.36

 

 

 

52,249

 

 

 

14.09

 

Vested

 

(13,081

)

 

 

14.34

 

 

 

(52,327

)

 

 

14.34

 

Forfeited

 

(2,000

)

 

 

13.55

 

 

 

0

 

 

 

0

 

Ending balance - non-vested shares

 

71,746

 

 

$

14.35

 

 

 

152,992

 

 

$

14.37

 

 

The 65,408 shares that vested during the three month period ended March 31, 2021 had a weighted average fair value of $14.34 per share.

 

35


 

 

Other Comprehensive Income (Loss):

The following table represents the details of other comprehensive income for the three month periods ended March 31, 2021 and 2020.

 

 

Three Months Ended March 31, 2021

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

Unrealized holding (losses) on available-for-sale securities during the period

$

(14,934

)

 

$

3,136

 

 

$

(11,798

)

Reclassification adjustment for (gains) included in net income (1)

 

(383

)

 

 

81

 

 

 

(302

)

Net other comprehensive (loss)

$

(15,317

)

 

$

3,217

 

 

$

(12,100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

Unrealized holding (losses) on available-for-sale securities during the period

$

(12,217

)

 

$

2,565

 

 

$

(9,652

)

Reclassification adjustment for (gains) included in net income (1)

 

(256

)

 

 

54

 

 

 

(202

)

Net other comprehensive (loss)

$

(12,473

)

 

$

2,619

 

 

$

(9,854

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Pre-tax reclassification adjustments relating to available-for-sale securities are reported in security gains and the tax impact is included in income tax expense on the consolidated statements of income.

 

 

Regulatory Capital Matters:

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices.  The new minimum capital requirements associated with the Basel Committee on capital and liquidity regulation (Basel III) were phased in beginning January 1, 2015 and was fully implemented on January 1, 2019.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action by regulators that, if undertaken, could have a direct material effect on the financial statements.  Management believes that as of March 31, 2021, the Company and the Bank meet all capital adequacy requirements to which they are subject.

The FDIC and other federal banking regulators revised the risk-based capital requirements applicable to financial holding companies and insured depository institutions, including the Company and the Bank, to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”).

The common equity tier 1 capital, tier 1 capital and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets.  The leverage ratio is calculated by dividing tier 1 capital by adjusted average total assets.

Basel III limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity tier 1 capital, tier 1 capital and total capital to risk-weighted assets in addition to the amount necessary to meet minimum risk-based capital requirements.  The capital conservation buffer phased in beginning January 1, 2016 and increased each year until it was fully implemented at 2.5% on January 1, 2019.  Excluding the additional buffer, Basel III requires the Company and the Bank to maintain (i) a minimum ratio of common equity tier 1 capital to risk-weighted assets of at least 4.5%, (ii) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0% and (iv) a minimum leverage ratio of at least 4.0%.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If only adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.  At March 31, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the institution’s category.

36


 

Actual and required capital amounts and ratios, which do not include the capital conservation buffer, are presented below at March 31, 2021 and December 31, 2020:

 

 

Actual

 

 

Requirement For Capital

Adequacy Purposes:

 

 

To be Well Capitalized

Under Prompt Corrective

Action Provisions:

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

289,485

 

 

13.49

%

 

$

96,555

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

276,057

 

 

12.89

%

 

 

96,391

 

 

4.5

%

 

 

139,231

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

323,893

 

 

15.10

%

 

 

171,653

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

300,992

 

 

14.05

%

 

 

171,362

 

 

8.0

%

 

 

214,202

 

 

10.0

%

Tier I risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

298,958

 

 

13.93

%

 

 

128,740

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

276,057

 

 

12.89

%

 

 

128,521

 

 

6.0

%

 

 

171,362

 

 

8.0

%

Tier I leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

298,958

 

 

9.69

%

 

 

123,442

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

276,057

 

 

8.99

%

 

 

122,858

 

 

4.0

%

 

 

153,572

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

279,864

 

 

13.22

%

 

$

95,211

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

268,041

 

 

12.71

%

 

 

94,903

 

 

4.5

%

 

$

137,083

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

311,413

 

 

14.72

%

 

 

169,264

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

290,185

 

 

13.76

%

 

 

168,717

 

 

8.0

%

 

 

210,897

 

 

10.0

%

Tier I risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

289,269

 

 

13.67

%

 

 

126,948

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

268,041

 

 

12.71

%

 

 

126,538

 

 

6.0

%

 

 

168,717

 

 

8.0

%

Tier I leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

289,269

 

 

9.77

%

 

 

118,464

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

268,041

 

 

9.10

%

 

 

117,877

 

 

4.0

%

 

 

147,346

 

 

5.0

%

 

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking and trust.  The trust and retirement consulting segments were combined in 2019.   These segments are also distinguished by the level of information provided to the chief operating decision makers in the Company, who use such information to review performance of various components of the business, which are then aggregated.  Loans, investments, and deposits provide the revenues in the banking operation.  All operations are domestic.  Significant segment totals are reconciled to the financial statements as follows:

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

5,988

 

 

$

46,871

 

 

$

(3,558

)

 

$

49,301

 

Total assets

 

$

15,668

 

 

$

3,308,577

 

 

$

279

 

 

$

3,324,524

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

6,046

 

 

$

47,129

 

 

$

(3,558

)

 

$

49,617

 

Total assets

 

$

15,147

 

 

$

3,055,628

 

 

$

373

 

 

$

3,071,148

 

37


 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

31

 

 

$

25,290

 

 

$

(54

)

 

$

25,267

 

Provision for credit losses

 

 

0

 

 

 

425

 

 

 

0

 

 

 

425

 

Service fees, security gains and other noninterest income

 

 

2,603

 

 

 

7,965

 

 

 

15

 

 

 

10,583

 

Noninterest expense

 

 

1,556

 

 

 

15,632

 

 

 

(218

)

 

 

16,970

 

Amortization and depreciation expense

 

 

64

 

 

 

666

 

 

 

68

 

 

 

798

 

Income before taxes

 

 

1,014

 

 

 

16,532

 

 

 

111

 

 

 

17,657

 

Income taxes

 

 

212

 

 

 

2,947

 

 

 

(58

)

 

 

3,101

 

Net income

 

$

802

 

 

$

13,585

 

 

$

169

 

 

$

14,556

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

34

 

 

$

22,352

 

 

$

(84

)

 

$

22,302

 

Provision for credit losses

 

 

0

 

 

 

1,100

 

 

 

0

 

 

 

1,100

 

Service fees, security gains and other noninterest income

 

 

2,243

 

 

 

5,620

 

 

 

(148

)

 

 

7,715

 

Noninterest expense

 

 

1,517

 

 

 

15,881

 

 

 

433

 

 

 

17,831

 

Amortization and depreciation expense

 

 

76

 

 

 

627

 

 

 

48

 

 

 

751

 

Income before taxes

 

 

684

 

 

 

10,364

 

 

 

(713

)

 

 

10,335

 

Income taxes

 

 

144

 

 

 

1,759

 

 

 

(207

)

 

 

1,696

 

Net income

 

$

540

 

 

$

8,605

 

 

$

(506

)

 

$

8,639

 

 

 

The Bank segment includes Farmers National Insurance and Farmers of Canfield Investment Co.

 

 

Short-term borrowings:

There were no short-term Federal Home Loan Bank Advances at March 31, 2021 and December 31, 2020.   The Company had $4.9 million and $2.2 million in securities sold under repurchase agreements for the periods ended March 31, 2021 and December 31, 2020, respectively.  In addition, the Company had no Federal funds purchased and has a $350 thousand balance with one lending institution at March 31, 2021 and December 31, 2020.

Securities sold under repurchase agreements are secured by the Bank’s holdings of debt securities issued by U.S. Government sponsored entities and agencies.  These pledged securities which are 105% of the repurchase agreement balances, had a carrying amount of $5.1 million and $2.3 million at March 31, 2021 and December 31, 2020.

The following table provides a disaggregation of the obligation by the class of collateral pledged for short-term financing obtained through the sales of repurchase agreements:

 

(In Thousands of Dollars)

 

March 31, 2021

 

 

December 31, 2020

 

Overnight and continuous repurchase agreements

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

 

$

148

 

 

$

42

 

State and political subdivisions

 

 

2,441

 

 

 

1,407

 

Mortgage-backed securities - residential

 

 

2,104

 

 

 

568

 

Collateralized mortgage obligations - residential

 

 

167

 

 

 

154

 

Total repurchase agreements

 

$

4,860

 

 

$

2,171

 

 

Management believes the risks associated with the agreements are minimal and, in the case of collateral decline, the Company has additional investment securities available to adequately pledge as guarantees for the repurchase agreements.  

 

38


 

 

Long-term borrowings:

There were $65.0 million in long-term Federal Home Loan Bank Advances at March 31, 2021 with a weighted average interest rate of 1.38%.  Long-term Federal Home Loan Bank Advances were $67.0 million at December 31, 2020.  In addition, the Company had two Trust Preferred Debentures with an outstanding balance of $9.5 million at March 31, 2021 and $9.4 million at December 31, 2020.  The final maturity of this Debt is December 31, 2036.

Long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage, commercial real estate, and multi-family loans totaling $610.1 million and $694.5 million at March 31, 2021 and December 31, 2020, respectively.  Based on this collateral, the Bank is eligible to borrow an additional $545.1 million at March 31, 2021.  Each advance is subject to a prepayment penalty if paid prior to its maturity date.

 

 

39


 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of historical fact, but rather statements based on the Company’s current expectations, beliefs and assumptions regarding the future of Farmers’ business, future plans and strategies, projections, anticipated events and trends, its intended results and future performance, the economy and other future conditions. Forward-looking statements are preceded by terms such as “will,” “would,” “should,” “could,” “may,” “expect,” “estimate,” “believe,” “anticipate,” “intend,” “plan” “project,” or variations of these words, or similar expressions. Forward-looking statements are not a guarantee of future performance and actual future results could differ materially from those contained in forward-looking information. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control.  Numerous uncertainties, risks, and changes could cause or contribute to Farmers’ actual results, performance, and achievements to be materially different from those expressed or implied by the forward-looking statements.  

Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”), including without limitation, the risk factors disclosed in Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as updated in Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q.  

Many of these factors are beyond the Company’s ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements.  The following, which is not intended to be an all-encompassing list, summarizes several factors that could cause the Company’s actual results to differ materially from those anticipated or expected in any forward-looking statement:

 

 

general economic conditions in markets where the Company conducts business, which could materially impact credit quality trends;

 

effects of the COVID-19 pandemic on the local, national, and international economy, our organization and employees, and our customers and suppliers and their business operations, financial condition, and including our customers’ ability to repay loans;

 

disruptions in the mortgage and lending markets and significant or unexpected fluctuations in interest rates related to COVID-19 and governmental responses, including financial stimulus packages;

 

general business conditions in the banking industry;

 

the regulatory environment;

 

general fluctuations in interest rates;

 

demand for loans in the market areas where the Company conducts business;

 

rapidly changing technology and evolving banking industry standards;

 

competitive factors, including increased competition with regional and national financial institutions;

 

and new service and product offerings by competitors and price pressures;

 

the impact of recent changes in the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including the provisions of additional economic stimulus from the federal government.

 

Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position.  There can be no assurance that future results will meet expectations.  While the Company believes that the forward-looking statements in the presentation are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made.  The Company does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, expect as may be required by applicable law.

Overview

The Company’s results of operations for the quarter ended March 31, 2021 are discussed below.  However, the Company’s past results of operations may not reflect its future operating trends.  In March 2020, the COVID-19 pandemic began to affect the U.S. economy and has created additional uncertainty for the Company’s business.  Regulatory actions in response to the COVID-19 pandemic have varied across jurisdictions and have included limited closure of nonessential businesses, affecting customers of the Company, although the Company as a financial institution has been considered an essential business.  The duration and extent of these regulatory measures is unknown.

40


 

The Company’s net income for the three months ended March 31, 2021 was $14.6 million, or $0.51 per diluted share, which compares to $8.6 million, or $0.30 per diluted share, for the three months ended March 31, 2020.  Net income excluding acquisition costs (non-GAAP) for the quarter ended March 31, 2021 was $14.6 million or $0.51 per share, compared to $9.7 million or $0.34 per share for the same quarter in 2020.  Annualized return on average assets and annualized return on average equity were 1.87% and 16.81%, respectively, for the three month period ending March 31, 2021, compared to 1.32% and 11.53% for the same three month period in 2020.  Farmers’ annualized return on average tangible equity (non-GAAP) was 19.30% for the quarter ended March 31, 2021 compared to 13.81% for the same quarter in 2020.

 

In response to the rapidly evolving COVID-19 pandemic, the Company focused first on the well-being of its people, customers and communities.  Preventative health measures were put in place including elimination of business related travel requirements, work from home requirements for all employees able to do so and social distancing precautions for all employees in the office.  At the beginning of the pandemic, the Company restricted access to branch lobbies to appointment only, but has now re-opened the lobbies using personal protective equipment and maintaining social distancing guidelines and continues to conduct preventative cleaning at all offices and branches. The Company also focused on business continuity measures, including forming a COVID-19 task force, monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors.

 

Farmers is offering special financial assistance to support customers who are experiencing financial hardships related to the COVID-19 pandemic. The following table reports the number and amount of payment deferrals by loan type as of dates listed:  

 

 

 

June 30, 2020

 

 

September 30, 2020

 

 

December 31, 2020

 

 

March 31, 2021

 

 

 

Outstanding Balance

 

 

Number of loans

 

 

Outstanding Balance

 

 

Number of loans

 

 

Outstanding Balance

 

 

Number of loans

 

 

Outstanding Balance

 

 

Number of loans

 

Commercial real estate

 

$

43,954

 

 

 

44

 

 

$

155

 

 

 

1

 

 

$

19,027

 

 

 

6

 

 

$

16,584

 

 

 

5

 

Commercial

 

 

8,515

 

 

 

69

 

 

0

 

 

0

 

 

 

1,424

 

 

 

2

 

 

0

 

 

0

 

Agricultural

 

 

8,340

 

 

 

22

 

 

 

469

 

 

 

2

 

 

0

 

 

0

 

 

0

 

 

0

 

Residential real estate

 

 

3,785

 

 

 

37

 

 

 

222

 

 

 

1

 

 

0

 

 

0

 

 

0

 

 

0

 

Consumer

 

 

1,858

 

 

 

100

 

 

 

2

 

 

 

1

 

 

 

2

 

 

 

1

 

 

0

 

 

0

 

Total

 

$

66,452

 

 

272

 

 

$

848

 

 

5

 

 

$

20,453

 

 

9

 

 

$

16,584

 

 

5

 

 

The Company offered three month deferrals upon request by the borrowers, beginning in the middle of March, 2020 and concluding at the end of the three month deferral period.  For those borrowers in industries that were greatly impacted by COVID-19, additional deferrals were considered and granted beyond the initial three month period.  The range of deferred months for subsequent requests were three to nine months.  The decline in deferred loans and balances was due to borrowers not requesting additional deferments and that most continued to pay under the original terms of their loan.

 

Farmers is also a preferred SBA lender and we dedicated significant additional staff and other resources to help our customers complete and submit their applications and supporting documentation for loans offered under the Paycheck Protection Program (PPP) under the CARES and HEROES acts, so they could obtain SBA approval and receive funding as quickly as possible.  During the initial 2020 period of the PPP program under CARES, the Company facilitated PPP assistance to 1,714 business customers totaling $199.8 million.  The Company, on behalf of its customers, began processing borrower applications for PPP forgiveness at the beginning of September 2020.  The SBA has up to ninety days to review an application for PPP forgiveness and provide a decision at the end of that review.  Once forgiveness of the PPP loans has been communicated and payment is received from the SBA, the Company will record the cash received from the SBA, pay-off the loans based on the amount of forgiveness provided and accelerate the amount of net deferred loan fees/costs recognized for the portion of the PPP loans that are forgiven.  During the period ended March 31, 2021, the Company had received life to date payments from the SBA for forgiveness of loans totaling $137.2 million, or approximately 68.7% of the first round of total PPP loans.  The Company has processed $75.1 million in new loans for the second round of PPP loan funding, under HEROES, during the quarter ended March 31, 2021.

 

41


 

 

Total loans were $2.04 billion at March 31, 2021 compared to $2.08 billion at December 31, 2020, representing an annualized growth rate of (1.96%).  Loans now comprise 69.5% of the Bank's first quarter average earning assets at March 31, 2021, compared to 78.6% for the same period in 2020.  The decrease in loans has resulted in a 0.3% decrease in tax equated loan interest income, including fees, in the first quarter of 2021 compared to the same quarter in 2020.  A summary of loans summarized by industries that have particular vulnerability to the effects of COVID-19 and their outstanding balance as a percentage of total loans is shown in the following table:

 

 

Outstanding Balance

 

% of total loans

 

Restaurants and Catering Facilities

$

44,412

 

 

2.18

%

Hotels

 

41,767

 

 

2.05

%

Golf Courses

 

7,233

 

 

0.35

%

Energy

 

1,340

 

 

0.07

%

Total

$

94,752

 

 

4.65

%

 

Non-performing assets to total assets remain at a low level, currently at 0.35%.  Early stage delinquencies, which are loans 30 - 89 days delinquent, also continue to remain at low levels, at $7.2 million, or 0.35% of total loans, at March 31, 2021.  Net charge-offs for the current quarter were $84 thousand, compared to $635 thousand in the same quarter in 2020 and net charge-offs as a percentage of average net loans outstanding is only 0.02% for the quarter ended March 31, 2021, compared to 0.13% in the same quarter in 2020.  Loan modifications due to COVID-19 could negatively impact these ratios.

The net interest margin for the three months ended March 31, 2021 was 3.58%, a 17 basis point decrease from the quarter ended March 31, 2020.  In comparing the first quarter of 2021 to the same period in 2020, asset yields decreased 72 basis points, while the cost of interest-bearing liabilities decreased 68 basis points.  Most of the decrease in the asset yields was the result of lower rates earned on loans, and taxable securities.  The cost of interest bearing liabilities decreased as the Federal Funds target rate was lowered to a target of 0-0.25% at the start of the COVID-19 pandemic in the United States.  Each of the major interest-bearing liability categories experienced cost decreases compared to one year ago.  The net interest margin for the quarter ended March 31, 2021 excluding interest and fees from PPP loans (non-GAAP) is 3.43%.  The net interest margin is also 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 6 basis points for the quarters ended March 31, 2021 and 2020.

The Company made progress in its effort to increase noninterest income, which increased 34.47% to $10.6 million for the quarter ended March 31, 2021 compared to $7.9 million in the same quarter of 2020.  Gains on the sales of mortgage loans increased $1.8 million or 133.16%, as lower interest rates prompted an increase in mortgage loan refinancing and new home purchases.  Trust fees increased $379 thousand or 20.41%, insurance agency commissions increased $118 thousand or 13.36% and debit card interchange fees increased $233 thousand or 27.38%.  Those increases were offset by a $287 thousand or 26.21% decrease in deposit account service charge income due to a change in consumer behavior during the COVID-19 pandemic.

The Company has remained committed to managing its level of noninterest expenses.  Total noninterest expenses for the first quarter of 2021 decreased 5.17% to $17.8 million compared to $18.7 million in the same quarter in 2020, primarily as a result of decreases in merger related costs of $1.3 million or 99.1%, core processing charges of $234 thousand or 27.18% and salaries and employee benefits of $255 thousand or 2.49%, respectively.  These decreases were slightly offset by an increase in occupancy expenses of $475 thousand or 26.39%, $240 thousand or 29.41% in professional fees and $169 thousand or 7.63% in other operating expenses.  Annualized noninterest expenses excluding acquisition costs (non-GAAP) measured as a percentage of quarterly average assets improved from 2.65% in the first quarter of 2020 to 2.28% in the first quarter of 2021.

The efficiency ratio for the quarter ended March 31, 2021 decreased to 48.24% compared to 59.72% for the same quarter in 2020.  The increase in mortgage banking income and net interest income, accompanied with lower noninterest expenses were the main drivers of the improvement.  

The Company’s return on average tangible equity (Non-GAAP) was 19.30% for the three month period ended March 31, 2021 compared to 13.81% for the same period in 2020.

Return on average tangible equity is a non-U.S. GAAP financial measure and should be considered in addition to, not a substitute for or superior to, financial measures determined in accordance with U.S. GAAP.  With respect to the calculation of the tangible equity for the three month period ended March 31, 2021 and 2020, reconciliations are displayed in the tables below.

42


 

Results of Operations The following is a comparison of selected financial ratios and other results at or for the three month period ended March 31, 2021 and 2020:

 

 

 

At or for the Three Months

Ended March 31,

 

(In Thousands, except Per Share Data)

 

2021

 

 

2020

 

Total assets

 

$

3,324,524

 

 

$

2,668,388

 

Net income

 

$

14,556

 

 

$

8,639

 

Diluted earnings per share

 

$

0.51

 

 

$

0.30

 

Return on average assets (annualized)

 

 

1.87

%

 

 

1.32

%

Return on average equity (annualized)

 

 

16.81

%

 

 

11.53

%

Efficiency ratio (tax equivalent basis) (1)

 

 

48.24

%

 

 

59.72

%

Equity to asset ratio

 

 

10.45

%

 

 

11.38

%

Tangible common equity ratio (2)

 

 

9.10

%

 

 

9.61

%

Dividends to net income

 

 

21.35

%

 

 

35.93

%

Net loans to assets

 

 

60.53

%

 

 

73.51

%

Loans to deposits

 

 

71.92

%

 

 

87.99

%

 

(1)

The ratio is calculated by dividing noninterest expenses by the sum of net interest income and noninterest income.  The Company strives for a lower efficiency ratio.  This efficiency ratio measure is not required by any regulatory agency but provides meaningful information to management and investors since a lower ratio indicates the Company is using their assets more effectively to generate profits.  

(2)

The tangible common equity ratio is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets.  The tangible common equity ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of the Company’s capital levels.  Since there is no authoritative requirement to calculate the tangible common equity ratio, the Company’s tangible common equity ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry.  Tangible common equity and tangible assets are non - U.S. GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP.  With respect to the calculation of the actual unaudited tangible common equity ratio as of March 31, 2021 and 2020, reconciliations of tangible common equity (non-GAAP) to U.S. GAAP total common stockholders’ equity and tangible assets (non-GAAP) to U.S. GAAP total assets are set forth below:

 

 

Reconciliation of Common Stockholders' Equity to Tangible Common Equity

 

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

(In Thousands of Dollars)

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

Stockholders' equity

 

$

347,355

 

 

$

350,097

 

 

$

303,736

 

Less goodwill and other intangibles

 

 

49,301

 

 

 

49,617

 

 

 

52,198

 

Tangible common equity

 

 

298,054

 

 

 

300,480

 

 

 

251,538

 

Average stockholders' equity

 

 

351,190

 

 

 

344,949

 

 

 

301,408

 

Less average goodwill and other intangibles

 

 

49,509

 

 

 

51,476

 

 

 

51,103

 

Average tangible common equity

 

$

301,681

 

 

$

293,473

 

 

$

250,305

 

 

43


 

 

Reconciliation of Total Assets to Tangible Assets

 

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

(In Thousands of Dollars)

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

Total assets

 

$

3,324,524

 

 

$

3,071,148

 

 

$

2,668,388

 

Less goodwill and other intangibles

 

 

49,301

 

 

 

49,617

 

 

 

52,198

 

Tangible assets

 

$

3,275,223

 

 

$

3,021,531

 

 

$

2,616,190

 

Average assets

 

 

3,155,695

 

 

 

3,033,005

 

 

 

2,641,597

 

Less average goodwill and other intangibles

 

 

49,509

 

 

 

51,476

 

 

 

51,103

 

Average tangible assets

 

$

3,106,186

 

 

$

2,981,529

 

 

$

2,590,494

 

 

 

Reconciliation of Net Income, Excluding Acquisition Costs

 

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

 

At or for the

Three Months

Ended

 

(In Thousands of Dollars)

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

Net Income

 

$

14,556

 

 

$

11,357

 

 

$

8,639

 

Acquisition related costs - tax equated

 

 

9

 

 

 

1,431

 

 

 

1,063

 

Net Income - adjusted

 

$

14,565

 

 

$

12,788

 

 

$

9,702

 

Diluted EPS excluding acquisition costs

 

$

0.51

 

 

$

0.45

 

 

$

0.34

 

 

 

Reconciliation of Allowance for Credit Losses to Gross Loans, Excluding PPP Loans and Acquired Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or for the Three Months Ended

 

 

At or for the Three Months Ended

 

 

At or for the Three Months Ended

 

(In Thousands of Dollars)

 

March 31, 2021

 

 

December 31, 2020

 

 

March 31, 2020

 

Gross Loans

 

$

2,037,404

 

 

$

2,078,044

 

 

$

1,976,582

 

PPP Loans

 

 

136,826

 

 

 

125,396

 

 

 

-

 

Loans less PPP

 

 

1,900,578

 

 

 

1,952,648

 

 

 

1,976,582

 

Allowance for Credit Losses to Gross Loans Excluding PPP (a)

 

 

1.31

%

 

 

1.13

%

 

 

0.76

%

Acquired Loans

 

 

251,616

 

 

 

272,150

 

 

 

352,529

 

Loans less PPP and Acquired

 

$

1,648,962

 

 

$

1,680,498

 

 

$

1,624,053

 

Allowance for Credit Losses to Gross Loans Excluding PPP and Acquired (a)

 

 

1.51

%

 

 

1.32

%

 

 

0.92

%

 

 

(a)

CECL method used for the March 31, 2021 quarter.  Prior periods used the incurred loss methodology.

 

 

 

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.

 

44


 

 

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2021

 

 

March 31, 2020

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (5) (6)

$

2,041,485

 

 

$

23,900

 

 

 

4.75

%

 

$

1,927,468

 

 

$

24,197

 

 

 

5.05

%

Taxable securities (4)

 

329,903

 

 

 

1,719

 

 

 

2.11

 

 

 

220,374

 

 

 

1,547

 

 

 

2.82

 

Tax-exempt securities (4) (6)

 

282,044

 

 

 

2,613

 

 

 

3.76

 

 

 

231,213

 

 

 

2,243

 

 

 

3.90

 

Equity securities (2)

 

14,840

 

 

 

121

 

 

 

3.31

 

 

 

16,304

 

 

 

140

 

 

 

3.45

 

Federal funds sold and other

 

268,872

 

 

 

71

 

 

 

0.11

 

 

 

57,900

 

 

 

149

 

 

 

1.04

 

TOTAL EARNING ASSETS

 

2,937,144

 

 

 

28,424

 

 

 

3.92

 

 

 

2,453,259

 

 

 

28,276

 

 

 

4.64

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

38,726

 

 

 

 

 

 

 

 

 

 

 

38,720

 

 

 

 

 

 

 

 

 

Premises and equipment

 

25,578

 

 

 

 

 

 

 

 

 

 

 

24,951

 

 

 

 

 

 

 

 

 

Allowance for credit losses

 

(25,336

)

 

 

 

 

 

 

 

 

 

 

(16,218

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

24,498

 

 

 

 

 

 

 

 

 

 

 

15,585

 

 

 

 

 

 

 

 

 

Other assets (3)

 

155,085

 

 

 

 

 

 

 

 

 

 

 

125,300

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

3,155,695

 

 

 

 

 

 

 

 

 

 

$

2,641,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

440,452

 

 

$

1,255

 

 

 

1.16

%

 

$

495,813

 

 

$

2,442

 

 

 

1.98

%

Brokered time deposits

 

32,000

 

 

 

46

 

 

 

0.58

 

 

 

105,493

 

 

 

483

 

 

 

1.83

 

Savings deposits

 

495,832

 

 

 

193

 

 

 

0.16

 

 

 

425,276

 

 

 

321

 

 

 

0.30

 

Demand deposits

 

1,083,597

 

 

 

732

 

 

 

0.27

 

 

 

690,705

 

 

 

1,393

 

 

 

0.81

 

Short term borrowings

 

2,808

 

 

 

4

 

 

 

0.58

 

 

 

62,476

 

 

 

320

 

 

 

2.06

 

Long term borrowings

 

76,007

 

 

 

293

 

 

 

1.56

 

 

 

100,230

 

 

 

456

 

 

 

1.83

 

TOTAL INTEREST-BEARING LIABILITIES

 

2,130,696

 

 

 

2,523

 

 

 

0.48

 

 

 

1,879,993

 

 

 

5,415

 

 

 

1.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

650,588

 

 

 

 

 

 

 

 

 

 

 

448,319

 

 

 

 

 

 

 

 

 

Other liabilities

 

23,221

 

 

 

 

 

 

 

 

 

 

 

11,877

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

351,190

 

 

 

 

 

 

 

 

 

 

 

301,408

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

3,155,695

 

 

 

 

 

 

 

 

 

 

$

2,641,597

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

25,901

 

 

 

3.44

%

 

 

 

 

 

$

22,861

 

 

 

3.48

%

Net interest margin

 

 

 

 

 

 

 

 

 

3.58

%

 

 

 

 

 

 

 

 

 

 

3.75

%

 

(1)

Rates are calculated on an annualized basis.

(2)

Equity securities include restricted stock, which is included in other assets on the consolidated balance sheets.

(3)

Non-accrual loans and overdraft deposits are included in other assets.

(4)

Includes unamortized discounts and premiums.  Average balance and yield are computed using the average historical amortized cost.

(5)

Interest on loans includes fee income of $2.8 million and $1.0 million for 2021 and 2020, respectively, and is reduced by amortization of $687 thousand and $664 thousand for 2021 and 2020, respectively.

(6)

For 2021, adjustments of $95 thousand and $539 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities.  For 2020, adjustments of $98 thousand and $461 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities.  These adjustments are based on a marginal federal income tax rate of 21%, less disallowances.

 

45


 

 

 

Net Interest Income.  Net interest income for the three month period ended March 31, 2021 was $25.3 million compared to $22.3 million for the same period in 2020.  On a tax equivalent basis net interest income was $25.9 million for the first quarter of 2021 compared to $22.9 million for the same period in 2020.  The net interest margin to average earning assets on a fully taxable equivalent basis decreased 17 basis points to 3.58% for the three months ended March 31, 2021, compared to 3.75% for the same three month period in the prior year.  In comparing the quarters ended March 31, 2021 and 2020, yields on earning assets decreased 72 basis points, while the cost of interest bearing liabilities decreased 68 basis points.  Excluding the amortization of premium on time deposits and the accretion of the loan portfolio discount, the net interest margin would have been 5 basis points lower for the quarter ended March 31, 2021.

Noninterest Income. Noninterest income increased 34.47% to $10.6 million for the quarter ended March 31, 2021 compared to $7.9 million in the same quarter of 2020.  Gains on the sales of mortgage loans increased $1.8 million or 133.16%, as lower interest rates prompted an increase in mortgage loan refinancing and new home purchases.  Trust fees increased $379 thousand or 20.41%, insurance agency commissions increased $118 thousand or 13.36% and debit card interchange fees increased $233 thousand or 27.38%.  Those increases were offset by a $287 thousand or 26.21% decrease in deposit account service charge income due to a change in consumer behavior during the COVID-19 pandemic.

Noninterest Expense.  Total noninterest expenses for the first quarter of 2021 decreased 5.17% to $17.8 million compared to $18.7 million in the same quarter in 2020, primarily as a result of decreases in merger related costs of $1.3 million or 99.1%, core processing charges of $234 thousand or 27.18% and salaries and employee benefits of $255 thousand or 2.49%, respectively.  These decreases were slightly offset by an increase in occupancy expenses of $475 thousand or 26.39%, $240 thousand or 29.41% in professional fees and $169 thousand or 7.63% in other operating expenses.  Annualized noninterest expenses excluding acquisition costs (non-GAAP) measured as a percentage of quarterly average assets improved from 2.65% in the first quarter of 2020 to 2.28% in the first quarter of 2021.

The Company’s tax equivalent efficiency ratio for the three month period ended March 31, 2021 was 48.24% compared to 59.72% for the same period in 2020.  The improvement in mortgage banking income and net interest income, accompanied with careful management of noninterest expenses were the main drivers of the improvement.

Income Taxes. Income tax expense totaled $3.1 million for the quarter ended March 31, 2021 and $1.7 million for the quarter ended March 31, 2020.  The effective tax rate for the three month period ended March 31, 2021 and 2020 was 17.56% and 16.41%, respectively.

Other Comprehensive Income.  For the quarter ended March 31, 2021, the change in net unrealized gains or losses on securities, net of reclassifications, resulted in an unrealized loss, net of tax, of $12.1 million, compared to $9.9 million for the same period in 2020.  The negative change in the fair value of securities for the three month period ended March 31, 2021 was the reason for the other comprehensive income decrease.

Financial Condition

Cash and Cash Equivalents.  Cash and cash equivalents increased $71.8 million during the first three months of 2021 from $254.6 million to $326.4 million.  The increase in the cash balance is part of normal fluctuations on the Company’s $3.325 billion balance sheet.  The Company expects cash and cash equivalents to be reduced to December 31, 2020 levels over the next few months as cash is used for loan growth and security portfolio purchases.

Securities.  Securities available-for-sale increased by $227.3 million since December 31, 2020.  The Company intends to continue purchasing securities in order to utilize excess cash on hand.

Loans.  Gross loans decreased $40.6 million since December 31, 2020.  The decrease in loans has occurred across many of the major loan categories but especially the commercial real estate and residential real estate loan portfolios.  The decrease is mainly due to a slow lending environment and the high level of competition in the lending arena.    

On a tax equated basis loan income decreased by $297 thousand compared to the same quarter in 2020.  The average tax equivalent interest rate on the loan portfolio was 4.75% for the three month period ended March 31, 2021 compared to 5.05% for the same period in 2020.

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.

46


 

Asset Quality History

(In Thousands of Dollars)

 

 

3/31/2021

 

 

12/31/2020

 

 

9/30/2020

 

 

6/30/2020

 

 

3/31/2020

 

Nonperforming loans

$

11,640

 

 

$

13,835

 

 

$

11,841

 

 

$

12,225

 

 

$

11,845

 

Nonperforming loans as a % of total loans

 

0.57

%

 

 

0.67

%

 

 

0.55

%

 

 

0.57

%

 

 

0.60

%

Loans delinquent 30-89 days

$

7,183

 

 

$

9,297

 

 

$

10,134

 

 

$

10,336

 

 

$

19,067

 

Loans delinquent 30-89 days as a % of total loans

 

0.35

%

 

 

0.45

%

 

 

0.47

%

 

 

0.48

%

 

 

0.97

%

Allowance for credit losses (a)

$

24,935

 

 

$

22,144

 

 

$

19,341

 

 

$

16,960

 

 

$

14,952

 

Allowance for credit losses as a % of loans (a)

 

1.22

%

 

 

1.07

%

 

 

0.90

%

 

 

0.79

%

 

 

0.76

%

Allowance for credit losses as a % of non-acquired loans (a)

 

1.35

%

 

 

1.22

%

 

 

1.03

%

 

 

0.92

%

 

 

0.92

%

Allowance for credit losses as a % of nonperforming loans (a)

 

214.22

%

 

 

160.06

%

 

 

163.34

%

 

 

138.73

%

 

 

126.23

%

Annualized net charge-offs to average net loans outstanding

 

0.02

%

 

 

0.04

%

 

 

0.04

%

 

 

0.08

%

 

 

0.13

%

Non-performing assets

$

11,670

 

 

$

13,835

 

 

$

11,914

 

 

$

12,266

 

 

$

11,976

 

Non-performing assets as a % of total assets

 

0.35

%

 

 

0.45

%

 

 

0.40

%

 

 

0.43

%

 

 

0.45

%

Net charge-offs for the quarter

$

84

 

 

$

197

 

 

$

219

 

 

$

392

 

 

$

635

 

 

(a)

The allowance for credit losses under CECL method is used for the period ended March 31, 2021 while prior periods use the incurred loss methodology.

In accordance with the accounting relief provisions of CARES and subsequent provisions of HEROES, the Bank postponed the adoption of the current expected credit losses (“CECL”) accounting standard from January 1, 2020 to January 1, 2021.  The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures.  Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.  The Company recorded the onetime adjustment to equity in the amount of $1.9 million, net of tax which increased the allowance for credit losses $2.5 million.

For the three months ended March 31, 2021 and 2020, management recorded a $425 thousand and $1.1 million provision for credit losses.  This reduced provision is the result of the impact of the initial CECL entry recorded to equity on January 1, 2021 and the improved current economic environment when compared to last year.  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. The allowance for credit losses as a percentage of the total loan portfolio was 1.22% at March 31, 2021 and 0.76% at March 31, 2020.  The loan portfolios acquired at fair market value from previous acquisitions were recorded at fair market value and without an associated allowance for credit loss.  When the acquired loans are excluded, the ratio of allowance for credit losses to total non-acquired loans is 1.35% at March 31, 2021 compared to 0.92% at March 31, 2020.  Early stage delinquencies, which are loans 30 - 89 days delinquent, as a percentage of total loans decreased from 0.97% at March 31, 2020 to 0.35% at March 31, 2021 and non-performing loans as a percentage of total loans decreased from 0.60% at March 31, 2020 to 0.57% at March 31, 2021.  The allowance for credit losses to non-performing loans increased from 126.23% at March 31, 2020 to 214.22% at March 31, 2021.  The amount of loans made to vulnerable industries (Restaurants, Hotels, Golf Courses and Energy) is less than 4.65% of our total loan portfolio.

Based on the evaluation of the adequacy of the allowance for credit losses, management believes that the allowance for credit losses at March 31, 2021 is adequate and reflects the new requirements of the newly adopted CECL standard.  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 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.

47


 

Deposits.  Total deposits increased $222.2 million from December 31, 2020 to March 31, 2021, for a balance of $2.8 billion.  Interest bearing accounts and brokered time deposits increased a combined $155.9 million, or 7.79%, during the first three months of 2021. The increase in interest bearing accounts is mostly due to an approximate increase of $113.8 million in public funds deposits.  Money market index accounts increased as customers moved funds out of certificates of deposit during the period.  The Company also believes a portion of the deposit growth is related to business customers depositing their PPP loan proceeds in their DDA (Demand Deposit Account).  The Company’s strategy is to maintain deposit balances.  At March 31, 2021, core deposits, which include, savings and money market accounts, time deposits less than $250 thousand, demand deposits and interest bearing demand deposits represented approximately 93.51% of total deposits.

Borrowings.  Total borrowing balances increased 1.00% from $78.9 million at December 31, 2020 to $79.7 million at March 31, 2021.   The use of brokered time deposits also had a positive impact on the overall cost of funds due to lower interest rates.  Short term borrowings increased by $2.7 million since December 31, 2020 and long term borrowings decreased $1.9 million during that same period ended March 31, 2021.

Capital Resources.  Total stockholders’ equity decreased $2.7 million, or 0.78%, during the three month period ended March 31, 2021.  The decrease in equity is due primarily to a decrease in other comprehensive income as a result of negative changes in the value of available for sale securities.  Shareholders received $0.11 per share in cash dividends in the first quarter of 2021.  Book value per share decreased from $12.42 per share at December 31, 2020 to $12.30 per share at March 31, 2021.  The Company’s tangible book value per share, which is a non-GAAP measure, also decreased, from $10.66 per share at December 31, 2020 to $10.56 per share at March 31, 2021.

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.  The Company must hold a capital conservation buffer of 2.5% above adequately capitalized risk-based capital ratios.  At March 31, 2021 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 13.49%, total risk-based capital ratio stood at 15.10%, and the Tier I risk-based capital ratio and Tier I leverage ratio were at 13.93% and 9.69%, respectively, at March 31, 2021.  The Company opted not to phase in, over 3 years, the effects of the initial CECL entry to equity for the implementation of ACS 326, recorded on January 1, 2021.  Management believes that the Company and the Bank meet all capital adequacy requirements to which they are subject, as of March 31, 2021.

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 community bank leverage ratio framework was available for banking organizations to use in their March 31, 2020, Call Report.  The Company has not elected to use the new framework as of March 31, 2021.

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 Annual Report on Form 10-K for the year ended December 31, 2020.  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 three 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, for both the investment and loan portfolios and if there is any impairment of goodwill or other intangible.  Additional information regarding these policies is included in the notes to the aforementioned 2020 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combination), Note 4 (Loans), and the sections captioned “Loan Portfolio.”

Securities classified as AFS are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity.  Any decision to sell a security classified as AFS would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.

48


 

The Company evaluates securities AFS in unrealized loss positions on a quarterly basis to determine whether the decline in fair value below the amortized costs basis (impairment) is due to credit-related factors or noncredit-related factors.  In making this evaluation, management considers the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.  Any impairment that is not credit-related is recognized in other comprehensive income, net of related deferred income taxes.  Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet based on the amount by which the amortized cost basis exceeds the fair value, with a corresponding charge to net income.  Both the ACL and the charge to net income may be reversed if conditions change. However, if the Company intends to sell an impaired AFS security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in net income with a corresponding adjustment to the security’s amortized cost basis rather than through the establishment of an ACL.  The Company has recorded no ACL related to the investment portfolio as of March 31, 2021.

The ACL represents management’s estimate of expected credit losses in the Company’s loan portfolio at the balance sheet date.  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.

Prior to January 1, 2021, as described in further detail in the Company’s 2020 Annual Report on Form 10-K, the Company used an incurred loss impairment model.  This methodology assessed the overall appropriateness of the allowance for credit losses and included allocations for specifically identified impaired loans and loss factors for all remaining loans, with a component primarily based on historical loss rates and another component primarily based on other qualitative factors.  Impaired loans were individually assessed and measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan was collateral dependent.  Loans that were determined not to be impaired were collectively evaluated for impairment, stratified by type and allocated loss ranges based on the Company’s actual historical loss ratios for each strata, and adjustments were also provided for certain environmental and other qualitative factors.

On January 1, 2021, the Company adopted CECL. This methodology also considers historical loss rates and other qualitative adjustments, as well as a new forward-looking component that considers reasonable and supportable forecasts over the expected life of each loan.  To develop the ACL estimate under the current expected loss model, the Company segments the loan portfolio into loan pools based on loan type and similar credit risk elements.  The Company uses the cohort and PD/LGD (Probability of Default/Loss Given Default) methodologies as described previously.      

U.S. 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.  U.S. 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.

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 and due from banks, as well as cash flows from maturities and repayments of loans, and 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, loan repayments, 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 March 31, 2021, this line of credit totaled $35 million of which the Bank had not borrowed against.  In addition, the Company has two revolving lines of credit with correspondent banks totaling $6.2 million. The outstanding balance at March 31, 2021 was $350 thousand.  Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis.  As of March 31, 2021, the Bank had outstanding balances with the Federal Home Loan Bank of $65.0 million with additional borrowing capacity of approximately $545.1 million, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds.  The Bank views its membership in the FHLB as a solid source of liquidity.  

49


 

The primary investing activities of the Company are originating loans and purchasing securities.  During the first three months of 2021, net cash used by investing activities amounted to $154.9 million, compared to $3.2 million provided by investing activities in the same period in 2020.  Loan originations and payments provided $43.0 million during the first three months of 2021, compared to the $15.6 million during the same period in 2020.  Purchases of securities available for sale used $241.3 million for the quarter ended March 31, 2021 compared to $25.2 million used during the first three months of 2020.

The primary financing activities of the Company are obtaining deposits, repurchase agreements and other borrowings.  Net cash provided by financing activities amounted to $219.7 million for the period ended March 31, 2021, compared to $3.3 million provided in financing activities for the same period in 2020.  Changes in deposits provided $222.2 million in the three month period ended March 31, 2021, compared to $54.1 million provided during the three month period ended March 31, 2020.

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 $456.3 million at March 31, 2021 and $425.5 million at December 31, 2020.  Additionally, the Company committed up to $8 million in subscriptions in Small Business Investment Company investment funds.  At March 31, 2021 the Company has invested the full $8 million in these funds.

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  

The Company’s ability to maximize net income is dependent, in part, on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities.  Because a large portion of assets and liabilities of the Company are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company.  Additionally, the Company’s balance sheet is slightly asset sensitive and in the uncertain interest rate environment that exists today, the Company’s net interest margin could be under additional pressure should interest rates fall even further or continue to remain low in the near future.

50


 

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 in the event of a sudden and sustained 300 basis point increase or 100 basis point decrease in market interest rates:

 

Changes In Interest Rate

(basis points)

 

March 31, 2021

Result

 

 

December 31, 2020

Result

 

 

ALCO

Guidelines

 

Net Interest Income Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

7.5

%

 

 

-1.6

%

 

 

-15

%

+200

 

 

4.7

%

 

 

-1.2

%

 

 

-10

%

+100

 

 

2.2

%

 

 

0.2

%

 

 

-5

%

-100

 

 

-3.0

%

 

 

-2.8

%

 

 

-5

%

Net Present Value Of Equity Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

19.1

%

 

 

8.9

%

 

 

-20

%

+200

 

 

14.8

%

 

 

5.0

%

 

 

-15

%

+100

 

 

8.4

%

 

 

27.8

%

 

 

-10

%

-100

 

 

-14.9

%

 

 

-19.0

%

 

 

-10

%

 

It should be noted that the change in the net present value of equity exceeded policy when the simulation model assumed a sudden decrease in rates of 100 basis points (1%).  This is primarily due to the positive impact on the fair value of assets not being as great as the negative impact on the fair value of certain liabilities.  Specifically, because core deposits typically bear relatively low interest rates, their fair value would be negatively impacted as the rates could not be adjusted by the full extent of the sudden decrease in rates.  Management will continue to monitor the policy exception and may consider changes to the asset/liability position in the future.  The remaining results of the simulations indicate that interest rate change results fall within internal limits established by the Company at March 31, 2021.  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, nor does it hold derivative financial instruments, and does not plan to purchase these instruments in the near future.

 

 

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 March 31, 2021, 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

Changes in the federal, state, or local tax laws may negatively impact our financial performance. On March 31, 2021, President Biden unveiled his infrastructure plan, which includes a proposal to increase the federal corporate tax rate from 21% to 28% as part of a package of tax reforms to help fund the spending proposals in the infrastructure plan. On April 28, 2021, President Biden announced additional significant proposals, including the American Families Plan, which are paid for largely by raising certain taxes.  Although the infrastructure plan remains in the early stages of the legislative process, it is expected to proceed in some form this year due to the

51


 

Democratic Party's slim majority in both houses of Congress. If adopted as proposed, the increase of the corporate tax rate would adversely affect our results of operations in future periods.  

For additional discussion of risk factors related to the Company, refer to Part 1, Item 1A, “Risk Factors,” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

On July 30, 2019, the Company announced that its Board of Directors authorized the purchase of up to 1,500,000 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 2019 Repurchase Program superseded the Company’s prior share repurchase program initially approved in 2012 authorizing the purchase of up to 920,000 shares of common stock.  The 2019 Repurchase Program was suspended by the Company during 2020.

The following table summarizes the treasury stock activity under the program during the three month period ended March 31, 2021.

Period

 

Total Number of

Shares Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Program

 

 

Maximum Number

of Shares that May

Yet be Purchased

Under the Program

 

Beginning balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

557,033

 

January 1-31

 

 

8,120

 

 

$

14.21

 

 

 

8,120

 

 

 

548,913

 

February 1-28

 

 

0

 

 

 

0

 

 

 

0

 

 

 

548,913

 

March 1-31

 

 

0

 

 

 

0

 

 

 

0

 

 

 

548,913

 

Ending balance

 

 

8,120

 

 

 

14.21

 

 

 

8,120

 

 

 

548,913

 

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

52


 

Item 6.

Exhibits

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

 

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 (File No. 333-70806)).

 

 

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 April 20, 2018).

 

 

3.3

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. 2021 Form of Notice of Grant of Long-term Incentive Plan Awards under 2017 Equity Incentive Plan (filed herewith).

 

 

10.2*

Farmers National Banc Corp. 2021 Form of Performance-based Equity Award under 2017 Equity Incentive Plan (filed herewith).

 

 

10.3*

Farmers National Banc Corp. 2021 Form of Service-based Restricted Stock Award under 2017 Equity Incentive Plan (filed herewith).

 

 

10.4*

Farmers National Banc Corp. 2021 Form of Performance-based Cash Award under 2017 Equity Incentive Plan (filed herewith).

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Kevin J. Helmick, President and Chief Executive Officer of the Company (filed herewith).

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (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 (filed herewith).

 

 

32.2

Certification pursuant to 18 U.S.C. Section 1350 of Carl D. Culp, Executive Vice President, Chief Financial Officer and Treasurer of the Company (filed herewith).

 

 

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, 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 March 31, 2021, has been formatted in Inline XBRL.

 

*

Constitutes a management contract or compensatory plan or arrangement.

 

53


 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FARMERS NATIONAL BANC CORP.

Dated: May 6, 2021

 

/s/ Kevin J. Helmick

Kevin J. Helmick

President and Chief Executive Officer

Dated: May 6, 2021

 

/s/ Carl D. Culp

Carl D. Culp

Senior Executive Vice President and Treasurer

 

54

Exhibit 10.1

Notice of Grant of

Restricted Stock Award,

Performance-based Equity Award, and

Performance-based Cash Award

Name

Address

City, State Zip

Subject to the terms and conditions of the 2017 Equity Incentive Plan and the Farmers National Banc Corp. Long-Term Incentive Plan (the “Plans”) and the accompanying Restricted Stock Award Agreement, Performance-based Equity Award Agreement, and Performance-based Cash Award Agreement (the “Award Agreements”), you have been granted Shares of Restricted Stock, Performance-based Shares, and a Performance-based Cash Award (collectively, the “Awards”) as follows:

Grant Date:

February 22, 2021

Number of Shares:

Your Awards consist of the following:

     Shares of Restricted Stock 1

     Performance-based Shares 2

$__Target Performance-based Cash 3

Vesting Schedule:

Your Awards of Shares of Restricted Stock, Performance-based Shares, and Performance-based Cash will be subject to vesting on February 22, 2024 (Normal Vesting Date).

Settlement:

Your Awards will be settled in Shares or Cash, depending on the Award, as described in the respective Award Agreements.

This Notice of Grant and the accompanying Award Agreements describe your Awards and the terms and conditions of your Awards.  To ensure you fully understand these terms and conditions, you should:

 

Read the Plan carefully to ensure you understand how the Plans work; and

 

Read this Notice of Grant and corresponding Award Agreement carefully to ensure you understand the nature of your Award and what you must do to earn it.  

You may contact Mark Nicastro by telephone (330-533-5025) or email (mnicastro@farmersbankgroup.com) if you have any questions about your Award or Award Agreement.

 

 

 

1 

Number of Shares of Restricted Stock were determined by multiplying $____ (the dollar amount used to determine your total target Awards) by .25, and dividing the result by $13.79 (the average reported closing price of a Share during the 30-day period ending on the last trading day prior to the Grant Date). The resulting number of Shares were rounded to the nearest whole Share.

2 

Number of Performance-based Shares were determined by multiplying $____ by .5, dividing the result by $13.79 (to determine the target number of Performance-based Shares), and multiplying the result by 2 (to determine the maximum number of Performance-based Shares). The resulting number of Performance-based Shares were rounded to the nearest whole Share.

3 

Your target Performance-based Cash Award was determined by multiplying $____ by .25.

 

Exhibit 10.2

FARMERS NATIONAL BANC CORP.

PERFORMANCE-BASED EQUITY AWARD AGREEMENT

(2021)

 

Farmers National Banc Corp. (the “Company”) hereby grants the undersigned Participant an Award pursuant to the Farmers National Banc Corp. 2017 Equity Incentive Plan (the “Equity LTI Plan”) as evidenced by the Notice of Grant accompanying this Award Agreement (the “Grant Notice”), and as further described in this Award Agreement (this “Award Agreement”).

1.

Nature of Award.  Effective as of the date specified in the Grant Notice (the “Grant Date”), the Company hereby grants to the individual identified in the Grant Notice (the “Participant”) the award as set forth in the Grant Notice (the “Award”).  The Award is subject to the terms and conditions described in the Equity LTI Plan, this Award Agreement and the Grant Notice.

 

2.

Performance Period:  The three-year period beginning January 1, 2021 and ending on December 31, 2023 (the “Performance Period”).

 

3.

Target Equity Award as Percentage of Base Compensation: ____% x .50 (the “Target Performance-Based Equity Award”).

 

4.

Earning an Award:  The Participant shall be eligible to receive a benefit in Company common shares equal in value based on the Grant Date between 0% and 200% of the Target Performance-Based Equity Award, based on achievement during the Performance Period of the Performance Objective set forth below. Performance between two stated levels will be interpolated when determining the percentage of the Target Performance-Based Equity Award earned.

The amount of the Target Performance-Based Equity Award that may be earned in Company common shares will be based on the sum of the Company’s return on equity for each fiscal year during the Performance Period divided by three (“Average ROE”), compared to the Average ROE of the Company’s Peer Group during the Performance Period (“Relative Average ROE”).  The total, maximum number of ROE Award Shares described in the Grant Notice eligible to be earned was determined by (i) dividing the dollar amount of Participant’s Target Performance-Based Equity Award by the average reported closing price of a share of Company common stock during the 30-day period ending on the day prior to the Grant Date of this Award, and (ii) multiplying the result by 200% (x 2.0), rounded to the nearest whole share.  Therefore, between 0% and 100% of the ROE Award Shares are subject to vesting on the “Normal Vesting Date” stated in the Grant Notice, in accordance with the following schedule and percentages:

Performance Objective:

Relative Average ROE during Performance Period

Percentage of Average

ROE Award Shares Earned

Less than Peer Group 25th percentile

0%

Equal to Peer Group 25th percentile (threshold)

10%

Equal to Peer Group 50th percentile (target)

50%

Equal to or higher than Peer Group 75th percentile (max)

100%

 

 

 


 

 

For these purposes: (i) Relative Average ROE shall be determined by the Committee in its sole discretion; and (ii) the Committee shall select the institutions constituting, and make such periodic adjustments as it determines appropriate to, the “Peer Group” in its sole discretion.

 

5.

Payment of Award:  With respect to the Performance Period, the Committee shall certify the level of achievement of the Performance Objective set forth in Section 4 and determine the amount payable with respect to your Award based on such level of achievement. Payment of the Award shall be made to the Participant on the Normal Vesting Date in the form of a number of Company common shares determined by multiplying the applicable percentage for the level of performance certified by the Compensation Committee times the Participant’s total number of ROE Award Shares. Any ROE Award Shares that do not vest as of the Normal Vesting Date will be forfeited.

6.

Limitations on Payment of Award:  The Committee may, in its sole discretion, reduce the amount payable with respect to the Award.

7.

Forfeiture of Awards:  If the Company is required to prepare an accounting restatement due to material non-compliance of the Company, as a result of misconduct by a Participant, with any financial reporting requirement under any applicable laws, the Participant shall reimburse the Company for all amounts received under the Equity LTI Plan within 30 days after receipt of notice of the same from the Company.

8.

Effect of Termination:  Participant may forfeit this Award if employment terminates prior to the Normal Vesting Date, although it will depend on the reason for termination as provided below:

 

(a)

Death, Disability or Retirement. If you terminate due to death, Disability, or Retirement, you will vest in a prorated portion of your ROE Award Shares determined by multiplying the number of your ROE Award Shares by a fraction, the numerator of which is the number of whole months you were employed from the Grant Date to the date of death, Disability or Retirement, and the denominator of which is 36.  Payment of the Award shall be made to the Participant in the form of a number of Company common shares determined by multiplying such pro rata portion of your ROE Award Shares by the applicable percentage for the level of performance certified by the Compensation Committee, with performance based on the Company’s relative Average ROE for the portion of the Performance Period that ended on the last day of the calendar quarter immediately preceding the date of termination. Such settlement of the Award will occur within ninety (90) days of the date of termination. Any ROE Award Shares that do not vest or are not so settled will be forfeited.

 

 

(b)

Termination by the Company without Cause or by Participant for Good Reason. If the Company terminates your employment without “Cause,” or you terminate your employment with the Company for “Good Reason,” each as defined in Exhibit A attached hereto and incorporated herein, you will vest in and receive a prorated portion of your ROE Award Shares determined in the same manner as described in Section 8(a) hereinabove based on your termination date.

 

 

(c)

Termination for any Other Reason. If your employment with the Company terminates under any other circumstance (including if such termination is by the Company for Cause regardless of whether such termination could also constitute a Retirement), your ROE Award Shares will be forfeited on your termination date.

 

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9.

Effect of Change in Control: Notwithstanding the foregoing, if a Change in Control occurs after the Grant Date, your ROE Award Shares will be subject to the following additional terms and conditions:

 

(a)

If such a Change in Control occurs prior to the Normal Vesting Date and in connection therewith or within two years thereafter your employment is terminated either by the Company or a successor in interest for any reason other than for “Cause” or by you for “Good Reason,” you shall be entitled to receive a number of Company common shares determined as though the Performance Objective had been satisfied at the “target” level of achievement for the Performance Period. Therefore, 50% of your unvested ROE Award Shares which remain unvested as of the termination date will fully vest.

10.

Restrictive Covenants.

 

 

(a)

Non-Solicitation.  The Participant acknowledges and agrees that as a condition to and in consideration of this Award Agreement, during the term of the Participant’s employment and for a period of twenty-four (24) months thereafter (the “Non-Solicitation Restrictive Period”), the Participant will not, directly or indirectly:

 

(i)

Solicit, engage or otherwise interfere with any customer or client who is at the time of termination or was within the preceding six (6) months of termination a customer or client of Company, its subsidiaries or any other related entity for the purposes of directly or indirectly furnishing any financial or banking services that a national banking association, bank holding company, state bank, savings and loan association or other regulated financial institution is permitted by law to conduct or furnish on the date the Participant’s employment is terminated.  

 

(ii)

Employ, solicit for employment, engage or otherwise interfere with any person who is at the time of termination or was within the preceding six (6) months of termination employed by the Company, its subsidiaries or any related entity, or otherwise directly or indirectly induce or take any action which would encourage or influence any such person to leave that person’s employment or terminate, reduce or modify their business or relationship with the Company, or any of its subsidiaries or related entities.

The restrictive covenants and Restrictive Periods provided for herein will not be construed to limit the application of any other restrictive covenant or restriction period set forth in any other agreement entered into between the Participant and the Company.

 

(b)

Nondisclosure and Non-appropriation of Information.  The Participant recognizes and acknowledges that while employed by the Company, the Participant will have access to, learn, be provided with and, in some cases, prepare and create, certain Confidential Information (as defined in section (c) below), proprietary information or Trade Secrets (as defined below) of the Company, including, but not limited to, processes, financial information, pricing information, operating techniques, marketing processes, training techniques, customer, vendor, and referral source lists, price and cost information, files and forms, (collectively, the “Trade Secrets”), all of which are of substantial value to the Company and the businesses conducted by it.  The Participant expressly covenants and agrees that the Participant will:

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(i)

Hold in a fiduciary capacity and not reveal, communicate, use or cause to be used for the Participant’s own benefit or divulge during the period of employment by the Company and for an indefinite period thereafter, any Confidential Information, proprietary information or Trade Secrets now or hereafter owned by the Company;

 

(ii)

Not sell, exchange, give away, or otherwise dispose of Confidential Information, proprietary information or Trade Secrets now or hereafter owned by the Company, whether the same will or may have been originated or discovered by the Company, the Participant or otherwise;

 

(iii)

Not reveal, divulge or make known to any person, firm, company or corporation any Confidential Information, proprietary information or Trade Secrets of the Company, unless such communication is required pursuant to a compulsory proceeding in which the Participant’s failure to provide such Confidential Information, proprietary information or Trade Secrets would subject the Participant to criminal or civil sanctions and then only to the extent that Executive provides prior notice to Company prior to disclosure.

 

(iv)

Return to the Company before termination of employment with the Company, any and all written information, material or equipment that constitutes, contains or relates in any way to Confidential Information, proprietary information, Trade Secrets and any other documents, equipment, and material of any kind relating in any way to the business of the Company, which are in the Participant’s possession, custody and control and which are or may be property of the Company, whether confidential or not, including any and all copies thereof which may have been made by or for the Participant and that the Participant will maintain no copies thereof after termination of the Participant’s employment.

 

(c)

Definitions.

 

(i)

“Confidential Information” means all information disclosed to or known by the Participant as a consequence of or through is employment with the Company which either has not been made generally available to the public and is useful or of value to the current or anticipated business of the Company; or has been identified to the Participant as confidential, either orally or in writing.  Confidential Information includes without limitation computer software and programs; marketing, manufacturing, organizational research and development; business plans; sales forecasts; identities, competence, abilities and compensation of other employees of the Company; pricing cost and other financial information; current and prospective customer and supplier lists and information about customers, suppliers or their employees; information concerning planned or pending acquisitions or divestitures; and information concerning purchases of equipment or property.  Confidential Information does not include information which is in or hereafter enters the public domain through no fault of the Participant, or is disclosed by a third party having the legal right to use and disclose the information.

 

(d)

Other Terms and Conditions.

 

(i)

The Participant acknowledges that the Participant is entering into this Award Agreement voluntarily and has given careful consideration to the restraints imposed by this Award Agreement.  Irrespective of the manner of any employment

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termination, the restraints imposed by this Award Agreement will be operative during their full time periods and throughout the restrictive areas set forth in this Award Agreement.  The Participant further acknowledges that if the Participant’s employment with the Company terminates for any reason the Participant can earn a livelihood without violating the foregoing restrictions and that the Participant’s ability to earn a livelihood without violating these restrictions is a material employment condition.  The Participant acknowledges and recognizes that if the Participant’s employment terminates for any reason, this Section 10 of this Award Agreement will survive any such termination and any expiration of this Award Agreement.  Further, the Participant agrees and consents that this Award Agreement is assignable by the Company.

 

(ii)

The Participant agrees that if a court of law finds that the provisions of this Award Agreement are too harsh so that they are unenforceable, then such court of law may enforce those restrictions and limitations which are acceptable and deemed enforceable by the court.

 

(iii)

In the event the Participant breaches the terms of this Award Agreement, it is agreed that all time periods contained in this Award Agreement will be tolled until the Participant ceases to breach this Award Agreement.

 

(e)

Injunction.  The parties acknowledge and agree, due to the subject matter of this Award Agreement, that money damages will be an inadequate remedy for a breach by Participant of any of the obligations hereunder.  Consequently, if the Participant breaches or threatens to breach any of the obligations under this Award Agreement, the Participant agrees that the Company shall have the right, in addition to any other rights or remedies available to it at law or in equity, to obtain equitable relief, including, without limitation, injunctive relief and specific performance, in the event of any breach or threatened breach. Further, the parties hereto agree and declare that it may be impossible to measure in monetary terms the damages that may accrue to the Company by reason of Participant’s violation of this Award Agreement.  Therefore, in the event that the Company, or any successor in interest thereto, shall institute an action or proceeding to enforce the provisions of this Award Agreement, each party or other person against whom such action or proceeding is brought shall and hereby does, in advance, waive the claim or defense that there is adequate remedy at law. In the event such injunctive relief is warranted and obtained by the Company, Participant agrees to pay all costs of said action, including reasonable attorney fees.

11.

Miscellaneous:

 

 

(a)

Non-Transferability.  An Award may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except by will or the laws of descent and distribution.  

 

 

(b)

Beneficiary. Unless otherwise specifically designated by the Participant in writing, a Participant’s beneficiary under the Equity LTI Plan shall be the Participant’s spouse or, if no spouse survives the Participant, the Participant’s estate.

 

 

(c)

No Right to Continued Service or to Awards.  The granting of an Award shall impose no obligation on the Company or any Affiliate to continue the employment of a Participant or interfere with or limit the right of the Company or any Affiliate to Terminate the employment of the Participant at any time, with or without Cause, which right is expressly reserved.  

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(d)

Tax Withholding.  The Company or an Affiliate, as applicable, shall have the power and the right to deduct, withhold or collect any amount required by law or regulation to be withheld with respect to any taxable event arising with respect to an Award granted under the Equity LTI Plan.

 

 

(e)

Requirements of Law.  The grant of Awards shall be subject to all applicable laws, rules and regulations (including applicable federal and state securities laws) and to all required approvals of any governmental agencies or national securities exchange, market or other quotation system.  

 

 

(f)

Governing Law.  The Equity LTI Plan and all Award Agreements shall be governed by and construed in accordance with the laws of (other than laws governing conflicts of laws) the State of Ohio.

 

 

(g)

Award Subject to Equity LTI Plan. The Award is subject to the terms and conditions described in this Award Agreement and the Equity LTI Plan, which is incorporated by reference into and made a part of this Award Agreement.  In the event of a conflict between the terms of the Equity LTI Plan and the terms of this Award Agreement, the terms of the Equity LTI Plan will govern.  The Committee has the sole responsibility of interpreting the Equity LTI Plan and this Award Agreement, and its determination of the meaning of any provision in the Equity LTI Plan or this Award Agreement will be binding on the Participant. Capitalized terms that are not defined in this Award Agreement have the same meanings as in the Equity LTI Plan.

 

(h)

Section 409A Payment Delay. If a Participant is determined to be a “specified employee” (within the meaning of Section 409A of the Code and as determined under the Company’s policy for determining specified employees), the Participant shall not be entitled to payment or to distribution of any portion of an Award that is subject to Section 409A of the Code (and for which no exception applies) and is payable or distributable on account of the Participant’s “separation from service” (within the meaning of Section 409A of the Code) until the expiration of six months from the date of such separation from service (or, if earlier, the Participant’s death).  Such Award, or portion thereof, shall be paid or distributed on the first business day of the seventh month following such separation from service.

 

 

(i)

Signature in Counterparts.  This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

[signature page attached]

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PARTICIPANT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date:

 

 

 

 

 

Print Name:

 

 

 

 

 

 

 

 

 

 

 

 

 

FARMERS NATIONAL BANC CORP.

 

 

 

 

 

By:

 

 

Date:

 

 

 

 

 

 

Its:

 

 

 

 

 

 

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EXHIBIT A

 

DEFINITIONS OF “CAUSE” AND “GOOD REASON”

 

“Cause” means that, in the reasonable judgment of the Compensation Committee, any of the following events have occurred: (1) the willful or negligent failure by the Participant to substantially perform his or her duties with the Company and, after written notification by the Company to the Participant, the continued failure of the Participant to substantially perform such duties; (2) the willful or negligent engagement by the Participant in conduct which is demonstrably and materially injurious to the Company, financially or otherwise; (3) action or inaction by the Participant that constitutes a breach of fiduciary duty with respect to the Company or any of its subsidiaries; (4) the violation of any material written policy, rule or regulation of the Company; or (5) the Participant’s material breach of any agreement in respect of confidentiality with the Company, whether or not entered into after the Grant Date.

 

“Good Reason” means the occurrence of any of the following: (1) a reduction in Participant’s annual base salary rate, unless such reduction generally applies to other Participants regardless of the reason(s) therefor; (2) a substantial diminution in Participant’s duties, authorities or responsibilities; or (3) the relocation of Participant’s principal place of employment with the Company such that (a) the distance from the former principal place of employment to the relocated principal place of employment is over 50 miles and (b) the distance from his or her primary residence to the relocated principal place of employment is over 50 miles; provided, however, that Good Reason shall exist only to the extent that Participant provides the Company with written notice of his or her intention to terminate employment with the Company for Good Reason that specifies the condition(s) constituting Good Reason and the Company fails to correct such condition(s) within ten (10) business days from receipt of such written notice. Notwithstanding the foregoing, Good Reason shall cease to exist for an event on the one hundred and twentieth (120th) day following the later of its occurrence or Participant’s knowledge thereof, unless Participant has given the Company written notice of such condition and of Participant’s intent to terminate for Good Reason prior to such date. With respect to the Chief Executive Officer only, Good Reason shall also include a change in responsibilities such that the Chief Executive Officer reports to someone other than directly to the Company’s Board of Directors.

 

-8-

Exhibit 10.3

FARMERS NATIONAL BANC CORP.

RESTRICTED STOCK AWARD AGREEMENT

(2021)

 

Farmers National Banc Corp. (the “Company”) hereby grants the undersigned Participant an Award pursuant to the Farmers National Banc Corp. 2017 Equity Incentive Plan (the “Plan”) as evidenced by the Notice of Grant accompanying this Award Agreement (the “Grant Notice”), and as further described in this Award Agreement (this “Award Agreement”).

1.

Nature of Award.  Effective as of the date specified in the Grant Notice (the “Grant Date”), the Company hereby grants to the individual identified in the Grant Notice (the “Participant”) the award as set forth in the Grant Notice (the “Award”).  The Award is subject to the terms and conditions described in the Plan, this Award Agreement and the Grant Notice.

 

2.

Number of Shares.  The number of Shares of Restricted Stock in your Award is set forth in the Grant Notice.  For purposes of this Award Agreement, each whole Share awarded represents the right to receive one Share.

 

3.

Vesting.  The Shares of Restricted Stock in your Award will be settled or will be forfeited depending on whether the terms and conditions described in the Grant Notice, this Award Agreement, and the Plan are satisfied. Accordingly, your Shares normally will vest on the “Normal Vesting Date” in accordance with the schedule identified in the Grant Notice. If the scheduled Normal Vesting Date is a non-business day, the next following business day will be considered the Normal Vesting Date.

4.

Forfeiture of Awards:  If the Company is required to prepare an accounting restatement due to material non-compliance of the Company, as a result of misconduct by a Participant, with any financial reporting requirement under any applicable laws, the Participant shall reimburse the Company for all amounts received under the Plan within 30 days after receipt of notice of the same from the Company.

5.

Effect of Termination:  Participant may forfeit this Award if employment terminates prior to the Normal Vesting Date, although it will depend on the reason for termination as provided below:

 

a.

Termination Due to Death or Disability.  If you terminate due to death or Disability, your Shares of Restricted Stock will vest fully on the date of your death or Disability.

 

b.

Termination Due to Retirement.  If you terminate due to Retirement, and provided that the Committee agrees to treat your termination as a Retirement, you will vest in a prorated portion of your Shares of Restricted Stock determined by multiplying the number of your Award Shares by a fraction, the numerator of which is the number of whole months you were employed from the Grant Date to the date of Retirement, and the denominator of which is 36.

 

c.

Termination by the Company without Cause or by Participant for Good Reason. If the Company terminates your employment without “Cause,” or you terminate your employment with the Company for “Good Reason,” each as defined in Exhibit A attached hereto and incorporated herein, you will vest in and receive a prorated portion of your Award Shares determined in the same manner as described in Section 5(b) hereinabove based on your termination date.

 

d.

Termination for any Other Reason.  If your employment with the Company terminates under any other circumstance (including if such termination is by the Company for Cause

 


 

 

regardless of whether such termination could also constitute a Retirement), your Shares of Restricted Stock will be forfeited on your termination date.

6.

Effect of Change in Control: Notwithstanding the foregoing, if a Change in Control occurs after the Grant Date, your Shares of Restricted Stock will be subject to the following additional terms and conditions:

 

a.

If such a Change in Control occurs prior to the Normal Vesting Date and in connection therewith or within two years thereafter your employment is terminated either by the Company or a successor in interest for any reason other than for “Cause” or by you for “Good Reason,” your Shares of Restricted Stock which remain unvested as of the termination date will fully vest.

7.

Restrictive Covenants.

 

 

a.

Non-Solicitation.  The Participant acknowledges and agrees that as a condition to and in consideration of this Award Agreement, during the term of the Participant’s employment and for a period of twenty-four (24) months thereafter (the “Non-Solicitation Restrictive Period”), the Participant will not, directly or indirectly:

 

(i)

Solicit, engage or otherwise interfere with any customer or client who is at the time of termination or was within the preceding six (6) months of termination a customer or client of Company, its subsidiaries or any other related entity for the purposes of directly or indirectly furnishing any financial or banking services that a national banking association, bank holding company, state bank, savings and loan association or other regulated financial institution is permitted by law to conduct or furnish on the date the Participant’s employment is terminated.  

 

(ii)

Employ, solicit for employment, engage or otherwise interfere with any person who is at the time of termination or was within the preceding six (6) months of termination employed by the Company, its subsidiaries or any related entity, or otherwise directly or indirectly induce or take any action which would encourage or influence any such person to leave that person’s employment or terminate, reduce or modify their business or relationship with the Company, or any of its subsidiaries or related entities.

The restrictive covenants and Restrictive Periods provided for herein will not be construed to limit the application of any other restrictive covenant or restriction period set forth in any other agreement entered into between the Participant and the Company.

 

b.

Nondisclosure and Non-appropriation of Information.  The Participant recognizes and acknowledges that while employed by the Company, the Participant will have access to, learn, be provided with and, in some cases, prepare and create, certain Confidential Information (as defined in section (c) below), proprietary information or Trade Secrets (as defined below) of the Company, including, but not limited to, processes, financial information, pricing information, operating techniques, marketing processes, training techniques, customer, vendor, and referral source lists, price and cost information, files and forms, (collectively, the “Trade Secrets”), all of which are of substantial value to the Company and the businesses conducted by it.  The Participant expressly covenants and agrees that the Participant will:

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(i)

Hold in a fiduciary capacity and not reveal, communicate, use or cause to be used for the Participant’s own benefit or divulge during the period of employment by the Company and for an indefinite period thereafter, any Confidential Information, proprietary information or Trade Secrets now or hereafter owned by the Company;

 

(ii)

Not sell, exchange, give away, or otherwise dispose of Confidential Information, proprietary information or Trade Secrets now or hereafter owned by the Company, whether the same will or may have been originated or discovered by the Company, the Participant or otherwise;

 

(iii)

Not reveal, divulge or make known to any person, firm, company or corporation any Confidential Information, proprietary information or Trade Secrets of the Company, unless such communication is required pursuant to a compulsory proceeding in which the Participant’s failure to provide such Confidential Information, proprietary information or Trade Secrets would subject the Participant to criminal or civil sanctions and then only to the extent that Executive provides prior notice to Company prior to disclosure.

 

(iv)

Return to the Company before termination of employment with the Company, any and all written information, material or equipment that constitutes, contains or relates in any way to Confidential Information, proprietary information, Trade Secrets and any other documents, equipment, and material of any kind relating in any way to the business of the Company, which are in the Participant’s possession, custody and control and which are or may be property of the Company, whether confidential or not, including any and all copies thereof which may have been made by or for the Participant and that the Participant will maintain no copies thereof after termination of the Participant’s employment.

 

c.

Definitions.

 

(i)

“Confidential Information” means all information disclosed to or known by the Participant as a consequence of or through is employment with the Company which either has not been made generally available to the public and is useful or of value to the current or anticipated business of the Company; or has been identified to the Participant as confidential, either orally or in writing.  Confidential Information includes without limitation computer software and programs; marketing, manufacturing, organizational research and development; business plans; sales forecasts; identities, competence, abilities and compensation of other employees of the Company; pricing cost and other financial information; current and prospective customer and supplier lists and information about customers, suppliers or their employees; information concerning planned or pending acquisitions or divestitures; and information concerning purchases of equipment or property.  Confidential Information does not include information which is in or hereafter enters the public domain through no fault of the Participant, or is disclosed by a third party having the legal right to use and disclose the information.

 

d.

Other Terms and Conditions.

 

(i)

The Participant acknowledges that the Participant is entering into this Award Agreement voluntarily and has given careful consideration to the restraints imposed by this Award Agreement.  Irrespective of the manner of any employment termination, the restraints imposed by this Award Agreement will be operative

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during their full time periods and throughout the restrictive areas set forth in this Award Agreement.  The Participant further acknowledges that if the Participant’s employment with the Company terminates for any reason the Participant can earn a livelihood without violating the foregoing restrictions and that the Participant’s ability to earn a livelihood without violating these restrictions is a material employment condition.  The Participant acknowledges and recognizes that if the Participant’s employment terminates for any reason, this Section 7 of this Award Agreement will survive any such termination and any expiration of this Award Agreement.  Further, the Participant agrees and consents that this Award Agreement is assignable by the Company.

 

(ii)

The Participant agrees that if a court of law finds that the provisions of this Award Agreement are too harsh so that they are unenforceable, then such court of law may enforce those restrictions and limitations which are acceptable and deemed enforceable by the court.

 

(iii)

In the event the Participant breaches the terms of this Award Agreement, it is agreed that all time periods contained in this Award Agreement will be tolled until the Participant ceases to breach this Award Agreement.

 

e.

Injunction.  The parties acknowledge and agree, due to the subject matter of this Award Agreement, that money damages will be an inadequate remedy for a breach by Participant of any of the obligations hereunder.  Consequently, if the Participant breaches or threatens to breach any of the obligations under this Award Agreement, the Participant agrees that the Company shall have the right, in addition to any other rights or remedies available to it at law or in equity, to obtain equitable relief, including, without limitation, injunctive relief and specific performance, in the event of any breach or threatened breach. Further, the parties hereto agree and declare that it may be impossible to measure in monetary terms the damages that may accrue to the Company by reason of Participant’s violation of this Award Agreement.  Therefore, in the event that the Company, or any successor in interest thereto, shall institute an action or proceeding to enforce the provisions of this Award Agreement, each party or other person against whom such action or proceeding is brought shall and hereby does, in advance, waive the claim or defense that there is adequate remedy at law. In the event such injunctive relief is warranted and obtained by the Company, Participant agrees to pay all costs of said action, including reasonable attorney fees.

8.

Miscellaneous:  

 

a.

Non-Transferability.  An Award may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except by will or the laws of descent and distribution.  

 

b.

Beneficiary. Unless otherwise specifically designated by the Participant in writing, a Participant’s beneficiary under the Plan shall be the Participant’s spouse or, if no spouse survives the Participant, the Participant’s estate.

 

c.

No Right to Continued Service or to Awards.  The granting of an Award shall impose no obligation on the Company or any Affiliate to continue the employment of a Participant or interfere with or limit the right of the Company or any Affiliate to Terminate the employment of the Participant at any time, with or without Cause, which right is expressly reserved.  

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d.

Tax Withholding.  The Company or an Affiliate, as applicable, shall have the power and the right to deduct, withhold or collect any amount required by law or regulation to be withheld with respect to any taxable event arising with respect to an Award granted under the Plan.

 

e.

Requirements of Law.  The grant of Awards shall be subject to all applicable laws, rules and regulations (including applicable federal and state securities laws) and to all required approvals of any governmental agencies or national securities exchange, market or other quotation system.  

 

f.

Governing Law.  The Plan and all Award Agreements shall be governed by and construed in accordance with the laws of (other than laws governing conflicts of laws) the State of Ohio.

 

g.

Award Subject to Plan. The Award is subject to the terms and conditions described in this Award Agreement and the Plan, which is incorporated by reference into and made a part of this Award Agreement.  In the event of a conflict between the terms of the Plan and the terms of this Award Agreement, the terms of the Plan will govern.  The Committee has the sole responsibility of interpreting the Plan and this Award Agreement, and its determination of the meaning of any provision in the Plan or this Award Agreement will be binding on the Participant. Capitalized terms that are not defined in this Award Agreement have the same meanings as in the Plan.

 

h.

Section 409A Payment Delay. If a Participant is determined to be a “specified employee” (within the meaning of Section 409A of the Code and as determined under the Company’s policy for determining specified employees), the Participant shall not be entitled to payment or to distribution of any portion of an Award that is subject to Section 409A of the Code (and for which no exception applies) and is payable or distributable on account of the Participant’s “separation from service” (within the meaning of Section 409A of the Code) until the expiration of six months from the date of such separation from service (or, if earlier, the Participant’s death).  Such Award, or portion thereof, shall be paid or distributed on the first business day of the seventh month following such separation from service.

 

i.

Signature in Counterparts.  This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

 

[signature page attached]


-5-


 

 

 

PARTICIPANT

 

FARMERS NATIONAL BANC CORP.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Signature

 

 

 

By:

 

 

 

 

 

 

 

 

 

Print

 

 

 

Its:

 

 

 

 

 

 

 

 

 

Date:

 

 

 

Date:

 

 

 

 

 


-6-


 

EXHIBIT A

 

DEFINITIONS OF “CAUSE” AND “GOOD REASON”

 

“Cause” means that, in the reasonable judgment of the Compensation Committee, any of the following events have occurred: (1) the willful or negligent failure by the Participant to substantially perform his or her duties with the Company and, after written notification by the Company to the Participant, the continued failure of the Participant to substantially perform such duties; (2) the willful or negligent engagement by the Participant in conduct which is demonstrably and materially injurious to the Company, financially or otherwise; (3) action or inaction by the Participant that constitutes a breach of fiduciary duty with respect to the Company or any of its subsidiaries; (4) the violation of any material written policy, rule or regulation of the Company; or (5) the Participant’s material breach of any agreement in respect of confidentiality with the Company, whether or not entered into after the Grant Date.

 

“Good Reason” means the occurrence of any of the following: (1) a reduction in Participant’s annual base salary rate, unless such reduction generally applies to other Participants regardless of the reason(s) therefor; (2) a substantial diminution in Participant’s duties, authorities or responsibilities; or (3) the relocation of Participant’s principal place of employment with the Company such that (a) the distance from the former principal place of employment to the relocated principal place of employment is over 50 miles and (b) the distance from his or her primary residence to the relocated principal place of employment is over 50 miles; provided, however, that Good Reason shall exist only to the extent that Participant provides the Company with written notice of his or her intention to terminate employment with the Company for Good Reason that specifies the condition(s) constituting Good Reason and the Company fails to correct such condition(s) within ten (10) business days from receipt of such written notice. Notwithstanding the foregoing, Good Reason shall cease to exist for an event on the one hundred and twentieth (120th) day following the later of its occurrence or Participant’s knowledge thereof, unless Participant has given the Company written notice of such condition and of Participant’s intent to terminate for Good Reason prior to such date. With respect to the Chief Executive Officer only, Good Reason shall also include a change in responsibilities such that the Chief Executive Officer reports to someone other than directly to the Company’s Board of Directors.

 

-7-

Exhibit 10.4

 

 

FARMERS NATIONAL BANC CORP.

PERFORMANCE-BASED CASH AWARD AGREEMENT

(2021)

 

Farmers National Banc Corp. (the “Company”) hereby grants the undersigned Participant an Award pursuant to the Farmers National Banc Corp. Long-Term Incentive Plan (the “Cash LTI Plan”), as evidenced by the Notice of Grant accompanying this Award Agreement (the “Grant Notice”), and as further described in this Award Agreement (this “Award Agreement”).

1.

Nature of Award.  Effective as of the date specified in the Grant Notice (the “Grant Date”), the Company hereby grants to the individual identified in the Grant Notice (the “Participant”) the award as set forth in the Grant Notice (the “Award”).  The Award is subject to the terms and conditions described in the Cash LTI Plan, this Award Agreement and the Grant Notice.

 

2.

Performance Period:  The three-year period beginning on the January 1, 2021 and ending on December 31, 2023 (the “Performance Period”).

 

3.

Target Cash Award as Percentage of Base Compensation: ____% x .25 (the “Target Performance-Based Cash Award”).

 

4.

Earning an Award:  The Participant shall be eligible to receive a payment equal to between 0% and 200% of the Target Performance-Based Cash Award, based on achievement during the Performance Period of the Performance Objective set forth below. Performance between two stated levels will be interpolated when determining the percentage of the Target Performance-Based Cash Award earned.

The percentage of the Target Performance-Based Cash Award that is earned will be based on the Company’s Total Shareholder Return (“TSR”) during the Performance Period compared to the Total Shareholder Return of the Company’s Peer Group during the Performance Period (“Relative TSR”), expressed as a percentile. Between 0% and 200% of the Target Performance-Based Cash Award is subject to vesting on the “Normal Vesting Date” stated in the Grant Notice, in accordance with the following schedule and percentages:

 

 

Performance Objective:

Relative TSR during Performance Period

Percentage of

Target Cash

Award Earned

 

Less than Peer Group 25th percentile

0%

 

Equal to Peer Group 25th percentile (threshold)

20%

 

Equal to Peer Group 50th percentile (target)

100%

 

Equal to or higher than Peer Group 75th percentile (max)

200%

 

For these purposes: (i) Relative TSR shall be determined by the Committee in its sole discretion; and (ii) the Committee shall select the institutions constituting, and make such periodic adjustments as it determines appropriate to, the “Peer Group” in its sole discretion.

 

5.

Payment of Award:  With respect to the Performance Period, the Committee shall certify the level of achievement of the Performance Objective set forth in Section 4 and determine the amount

 


 

payable with respect to your Award based on such level of achievement. Payment of the Award shall be made to the Participant in cash in a single lump sum on the Normal Vesting Date determined by multiplying the applicable percentage for the level of performance certified by the Compensation Committee times the Participant’s Target Performance-Based Cash Award.

 

6.

Limitations on Payment of Award:  The Committee may, in its sole discretion, reduce the amount payable with respect to the Award.

 

7.

Forfeiture of Awards:  If the Company is required to prepare an accounting restatement due to material non-compliance of the Company, as a result of misconduct by a Participant, with any financial reporting requirement under any applicable laws, the Participant shall reimburse the Company for all amounts received under the Cash LTI Plan within 30 days after receipt of notice of the same from the Company.

 

8.

Effect of Termination:  Participant may forfeit this Award if employment terminates prior to the Normal Vesting Date, although it will depend on the reason for termination as provided below:

 

(a)

Death, Disability or Retirement. If you terminate due to death, Disability, or Retirement, the amount of your Award (if any) shall be multiplied by a fraction, the numerator of which is the number of whole months you were employed from the Grant Date to the date of death, Disability or Retirement, and the denominator of which is 36.  Payment of the Award shall be made to the Participant in cash in a single lump sum determined by multiplying such pro rata portion of your Target Performance-Based Cash Award by the applicable percentage for the level of performance certified by the Compensation Committee, with performance based on the Company’s relative TSR for the portion of the Performance Period that ended on the last day of the calendar quarter immediately preceding the date of termination. Such payment of the Award will occur within ninety (90) days of the date of termination.

 

 

(b)

Termination by the Company without Cause or by Participant for Good Reason. If the Company terminates your employment without “Cause,” or you terminate your employment with the Company for “Good Reason,” each as defined in Exhibit A attached hereto and incorporated herein, you will be paid a prorated portion of your Target Performance-Based Cash Award determined in the same manner as described in Section 8(a) hereinabove based on your termination date.

 

 

(c)

Termination for any Other Reason. If your employment with the Company terminates under any other circumstance (including if such termination is by the Company for Cause regardless of whether such termination could also constitute a Retirement), you shall forfeit any rights with respect to the Award on your termination date.

 

9.

Effect of Change in Control: Notwithstanding the foregoing, if a Change in Control occurs after the Grant Date, your Award will be subject to the following additional terms and conditions:

 

(a)

If such a Change in Control occurs prior to the Normal Vesting Date and in connection therewith or within two years thereafter your employment is terminated either by the Company or a successor in interest for any reason other than for “Cause” or by you for “Good Reason,” you shall be entitled to receive a payment equal to the amount payable with respect to your Award as though the Performance Objective had been satisfied at the “target” level of achievement for the Performance Period.  Therefore, you shall be entitled to a payment in the amount of 100% of your Target Performance-Based Cash

-2-


 

 

Award. Payment will be made in a single lump-sum cash payment within 60 days following the termination date.

10.

Restrictive Covenants.

 

 

(a)

Non-Solicitation.  The Participant acknowledges and agrees that as a condition to and in consideration of this Award Agreement, during the term of the Participant’s employment and for a period of twenty-four (24) months thereafter (the “Non-Solicitation Restrictive Period”), the Participant will not, directly or indirectly:

 

(i)

Solicit, engage or otherwise interfere with any customer or client who is at the time of termination or was within the preceding six (6) months of termination a customer or client of Company, its subsidiaries or any other related entity for the purposes of directly or indirectly furnishing any financial or banking services that a national banking association, bank holding company, state bank, savings and loan association or other regulated financial institution is permitted by law to conduct or furnish on the date the Participant’s employment is terminated.  

 

(ii)

Employ, solicit for employment, engage or otherwise interfere with any person who is at the time of termination or was within the preceding six (6) months of termination employed by the Company, its subsidiaries or any related entity, or otherwise directly or indirectly induce or take any action which would encourage or influence any such person to leave that person’s employment or terminate, reduce or modify their business or relationship with the Company, or any of its subsidiaries or related entities.

The restrictive covenants and Restrictive Periods provided for herein will not be construed to limit the application of any other restrictive covenant or restriction period set forth in any other agreement entered into between the Participant and the Company.

 

(b)

Nondisclosure and Non-appropriation of Information.  The Participant recognizes and acknowledges that while employed by the Company, the Participant will have access to, learn, be provided with and, in some cases, prepare and create, certain Confidential Information (as defined in section (c) below), proprietary information or Trade Secrets (as defined below) of the Company, including, but not limited to, processes, financial information, pricing information, operating techniques, marketing processes, training techniques, customer, vendor, and referral source lists, price and cost information, files and forms, (collectively, the “Trade Secrets”), all of which are of substantial value to the Company and the businesses conducted by it.  The Participant expressly covenants and agrees that the Participant will:

 

(i)

Hold in a fiduciary capacity and not reveal, communicate, use or cause to be used for the Participant’s own benefit or divulge during the period of employment by the Company and for an indefinite period thereafter, any Confidential Information, proprietary information or Trade Secrets now or hereafter owned by the Company;

 

(ii)

Not sell, exchange, give away, or otherwise dispose of Confidential Information, proprietary information or Trade Secrets now or hereafter owned by the Company, whether the same will or may have been originated or discovered by the Company, the Participant or otherwise;

-3-


 

 

(iii)

Not reveal, divulge or make known to any person, firm, company or corporation any Confidential Information, proprietary information or Trade Secrets of the Company, unless such communication is required pursuant to a compulsory proceeding in which the Participant’s failure to provide such Confidential Information, proprietary information or Trade Secrets would subject the Participant to criminal or civil sanctions and then only to the extent that Executive provides prior notice to Company prior to disclosure.

 

(iv)

Return to the Company before termination of employment with the Company, any and all written information, material or equipment that constitutes, contains or relates in any way to Confidential Information, proprietary information, Trade Secrets and any other documents, equipment, and material of any kind relating in any way to the business of the Company, which are in the Participant’s possession, custody and control and which are or may be property of the Company, whether confidential or not, including any and all copies thereof which may have been made by or for the Participant and that the Participant will maintain no copies thereof after termination of the Participant’s employment.

 

(c)

Definitions.

 

(i)

“Confidential Information” means all information disclosed to or known by the Participant as a consequence of or through is employment with the Company which either has not been made generally available to the public and is useful or of value to the current or anticipated business of the Company; or has been identified to the Participant as confidential, either orally or in writing.  Confidential Information includes without limitation computer software and programs; marketing, manufacturing, organizational research and development; business plans; sales forecasts; identities, competence, abilities and compensation of other employees of the Company; pricing cost and other financial information; current and prospective customer and supplier lists and information about customers, suppliers or their employees; information concerning planned or pending acquisitions or divestitures; and information concerning purchases of equipment or property.  Confidential Information does not include information which is in or hereafter enters the public domain through no fault of the Participant, or is disclosed by a third party having the legal right to use and disclose the information.

 

(d)

Other Terms and Conditions.

 

(i)

The Participant acknowledges that the Participant is entering into this Award Agreement voluntarily and has given careful consideration to the restraints imposed by this Award Agreement.  Irrespective of the manner of any employment termination, the restraints imposed by this Award Agreement will be operative during their full time periods and throughout the restrictive areas set forth in this Award Agreement.  The Participant further acknowledges that if the Participant’s employment with the Company terminates for any reason the Participant can earn a livelihood without violating the foregoing restrictions and that the Participant’s ability to earn a livelihood without violating these restrictions is a material employment condition.  The Participant acknowledges and recognizes that if the Participant’s employment terminates for any reason, this Section 10 of the Award Agreement will survive any such termination and any expiration of this Award

-4-


 

 

Agreement.  Further, the Participant agrees and consents that this Award Agreement is assignable by the Company.

 

(ii)

The Participant agrees that if a court of law finds that the provisions of this Award Agreement are too harsh so that they are unenforceable, then such court of law may enforce those restrictions and limitations which are acceptable and deemed enforceable by the court.

 

(iii)

In the event the Participant breaches the terms of this Award Agreement, it is agreed that all time periods contained in this Award Agreement will be tolled until the Participant ceases to breach this Award Agreement.

 

(e)

Injunction.  The parties acknowledge and agree, due to the subject matter of this Award Agreement, that money damages will be an inadequate remedy for a breach by Participant of any of the obligations hereunder.  Consequently, if the Participant breaches or threatens to breach any of the obligations under this Award Agreement, the Participant agrees that the Company shall have the right, in addition to any other rights or remedies available to it at law or in equity, to obtain equitable relief, including, without limitation, injunctive relief and specific performance, in the event of any breach or threatened breach. Further, the parties hereto agree and declare that it may be impossible to measure in monetary terms the damages that may accrue to the Company by reason of Participant’s violation of this Award Agreement.  Therefore, in the event that the Company, or any successor in interest thereto, shall institute an action or proceeding to enforce the provisions of this Award Agreement, each party or other person against whom such action or proceeding is brought shall and hereby does, in advance, waive the claim or defense that there is adequate remedy at law. In the event such injunctive relief is warranted and obtained by the Company, Participant agrees to pay all costs of said action, including reasonable attorney fees.

 

11.

Miscellaneous:  

 

(a)

Non-Transferability.  An Award may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, except by will or the laws of descent and distribution.  

 

 

(b)

Beneficiary. Unless otherwise specifically designated by the Participant in writing, a Participant’s beneficiary under the Cash LTI Plan shall be the Participant’s spouse or, if no spouse survives the Participant, the Participant’s estate.

 

 

(c)

No Right to Continued Service or to Awards.  The granting of an Award shall impose no obligation on the Company or any Affiliate to continue the employment of a Participant or interfere with or limit the right of the Company or any Affiliate to Terminate the employment of the Participant at any time, with or without Cause, which right is expressly reserved.  

 

 

(d)

Tax Withholding.  The Company or an Affiliate, as applicable, shall have the power and the right to deduct, withhold or collect any amount required by law or regulation to be withheld with respect to any taxable event arising with respect to an Award granted under the Cash LTI Plan.

 

 

(e)

Requirements of Law.  The grant of Awards shall be subject to all applicable laws, rules and regulations (including applicable federal and state securities laws) and to all required approvals of any governmental agencies or national securities exchange, market or other

-5-


 

 

quotation system.  

 

 

(f)

Governing Law.  The Cash LTI Plan and all Award Agreements shall be governed by and construed in accordance with the laws of (other than laws governing conflicts of laws) the State of Ohio.

 

 

(g)

Award Subject to Cash LTI Plan. The Award is subject to the terms and conditions described in this Award Agreement and the Cash LTI Plan, which is incorporated by reference into and made a part of this Award Agreement.  In the event of a conflict between the terms of the Cash LTI Plan and the terms of this Award Agreement, the terms of the Cash LTI Plan will govern.  The Committee has the sole responsibility of interpreting the Cash LTI Plan and this Award Agreement, and its determination of the meaning of any provision in the Cash LTI Plan or this Award Agreement will be binding on the Participant. Capitalized terms that are not defined in this Award Agreement have the same meanings as in the Cash LTI Plan.

 

 

(h)

Section 409A Payment Delay. If a Participant is determined to be a “specified employee” (within the meaning of Section 409A of the Code and as determined under the Company’s policy for determining specified employees), the Participant shall not be entitled to payment or to distribution of any portion of an Award that is subject to Section 409A of the Code (and for which no exception applies) and is payable or distributable on account of the Participant’s “separation from service” (within the meaning of Section 409A of the Code) until the expiration of six months from the date of such separation from service (or, if earlier, the Participant’s death).  Such Award, or portion thereof, shall be paid or distributed on the first business day of the seventh month following such separation from service.

 

 

(i)

Signature in Counterparts.  This Award Agreement may be signed in counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument.

[signature page attached]


-6-


 

 

 

PARTICIPANT

 

 

 

 

 

 

 

 

 

 

 

Date:

 

 

 

 

 

 

Print Name:

 

 

 

 

 

 

 

 

 

FARMERS NATIONAL BANC CORP.

 

 

 

 

 

 

 

 

By:

 

 

Date:

 

 

 

 

 

 

Its:

 

 

 

 

 

-7-


 

 

EXHIBIT A

 

DEFINITIONS OF “CAUSE” AND “GOOD REASON”

 

“Cause” means that, in the reasonable judgment of the Compensation Committee, any of the following events have occurred: (1) the willful or negligent failure by the Participant to substantially perform his or her duties with the Company and, after written notification by the Company to the Participant, the continued failure of the Participant to substantially perform such duties; (2) the willful or negligent engagement by the Participant in conduct which is demonstrably and materially injurious to the Company, financially or otherwise; (3) action or inaction by the Participant that constitutes a breach of fiduciary duty with respect to the Company or any of its subsidiaries; (4) the violation of any material written policy, rule or regulation of the Company; or (5) the Participant’s material breach of any agreement in respect of confidentiality with the Company, whether or not entered into after the Grant Date.

 

“Good Reason” means the occurrence of any of the following: (1) a reduction in Participant’s annual base salary rate, unless such reduction generally applies to other Participants regardless of the reason(s) therefor; (2) a substantial diminution in Participant’s duties, authorities or responsibilities; or (3) the relocation of Participant’s principal place of employment with the Company such that (a) the distance from the former principal place of employment to the relocated principal place of employment is over 50 miles and (b) the distance from his or her primary residence to the relocated principal place of employment is over 50 miles; provided, however, that Good Reason shall exist only to the extent that Participant provides the Company with written notice of his or her intention to terminate employment with the Company for Good Reason that specifies the condition(s) constituting Good Reason and the Company fails to correct such condition(s) within ten (10) business days from receipt of such written notice. Notwithstanding the foregoing, Good Reason shall cease to exist for an event on the one hundred and twentieth (120th) day following the later of its occurrence or Participant’s knowledge thereof, unless Participant has given the Company written notice of such condition and of Participant’s intent to terminate for Good Reason prior to such date. With respect to the Chief Executive Officer only, Good Reason shall also include a change in responsibilities such that the Chief Executive Officer reports to someone other than directly to the Company’s Board of Directors.

-8-

 

Exhibit 31.1

CERTIFICATIONS

Certification of Chief Executive Officer

CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q

I, Kevin J. Helmick certify that:

1) I have reviewed this quarterly report on Form 10-Q of Farmers National Banc Corp.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2021

/s/ Kevin J. Helmick

Kevin J. Helmick

Chief Executive Officer

 

 

Exhibit 31.2

CERTIFICATIONS

Certification of Chief Financial Officer

CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q

I, Carl D. Culp certify that:

1) I have reviewed this quarterly report on Form 10-Q of Farmers National Banc Corp.;

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 6, 2021

/s/ Carl D. Culp

Carl D. Culp

Chief Financial Officer

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Farmers National Banc Corp. (the “Corporation”) on Form 10-Q for the period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Kevin J. Helmick, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Kevin J. Helmick

Kevin J. Helmick

Chief Executive Officer

May 6, 2021

 

 

 

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Farmers National Banc Corp. (the “Corporation”) on Form 10-Q for the period ended March 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I Carl D. Culp, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.

/s/ Carl D. Culp

Carl D. Culp

Chief Financial Officer

May 6, 2021