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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, 2022

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)

 

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 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  ☒

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, 2022

Common Stock, No Par Value

 

34,007,677 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

31

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

Item 4

Controls and Procedures

39

 

 

 

PART II - OTHER INFORMATION

40

 

 

 

Item 1

Legal Proceedings

40

 

 

 

Item 1A

Risk Factors

40

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

Item 3

Defaults Upon Senior Securities

40

 

 

 

Item 4

Mine Safety Disclosures

40

 

 

 

Item 5

Other Information

40

 

 

 

Item 6

Exhibits

41

 

 

SIGNATURES

43

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1

 

 

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

March 31,

2022

 

 

December 31,

2021

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

29,224

 

 

$

29,150

 

Federal funds sold and other

 

 

108,403

 

 

 

83,640

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

137,627

 

 

 

112,790

 

Securities available for sale

 

 

1,463,626

 

 

 

1,427,677

 

Other investments

 

 

34,019

 

 

 

30,459

 

Loans held for sale

 

 

1,904

 

 

 

4,545

 

Loans

 

 

2,304,971

 

 

 

2,331,082

 

Less allowance for credit losses

 

 

27,015

 

 

 

29,386

 

NET LOANS

 

 

2,277,956

 

 

 

2,301,696

 

Premises and equipment, net

 

 

37,105

 

 

 

37,520

 

Goodwill

 

 

94,240

 

 

 

94,240

 

Other intangibles, net

 

 

7,947

 

 

 

8,366

 

Bank owned life insurance

 

 

74,264

 

 

 

73,855

 

Other assets

 

 

77,167

 

 

 

51,601

 

TOTAL ASSETS

 

$

4,205,855

 

 

$

4,142,749

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

963,143

 

 

$

916,237

 

Interest-bearing

 

 

2,690,668

 

 

 

2,630,998

 

Brokered time deposits

 

 

40,000

 

 

 

0

 

TOTAL DEPOSITS

 

 

3,693,811

 

 

 

3,547,235

 

Long-term borrowings

 

 

87,872

 

 

 

87,758

 

Other liabilities

 

 

30,286

 

 

 

35,324

 

TOTAL LIABILITIES

 

 

3,811,969

 

 

 

3,670,317

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 50,000,000 shares in 2022 and 2021; 35,128,962 shares issued in 2022 and 2021 and 34,007,677 and 33,898,237 shares outstanding in 2022 and 2021, respectively

 

 

304,670

 

 

 

306,123

 

Retained earnings

 

 

184,302

 

 

 

173,896

 

Accumulated other comprehensive income

 

 

(79,500

)

 

 

9,295

 

Treasury stock, at cost; 1,121,285 and 1,230,725 shares in 2022 and 2021, respectively

 

 

(15,586

)

 

 

(16,882

)

TOTAL STOCKHOLDERS' EQUITY

 

 

393,886

 

 

 

472,432

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

4,205,855

 

 

$

4,142,749

 

 

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,

2022

 

 

March 31,

2021

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

25,562

 

 

$

23,805

 

Taxable securities

 

 

4,587

 

 

 

1,719

 

Tax exempt securities

 

 

2,952

 

 

 

2,074

 

Dividends

 

 

130

 

 

 

121

 

Federal funds sold and other interest income

 

 

48

 

 

 

71

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

33,279

 

 

 

27,790

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

1,244

 

 

 

2,226

 

Short-term borrowings

 

 

1

 

 

 

4

 

Long-term borrowings

 

 

792

 

 

 

293

 

TOTAL INTEREST EXPENSE

 

 

2,037

 

 

 

2,523

 

NET INTEREST INCOME

 

 

31,242

 

 

 

25,267

 

(Credit) provision for credit losses

 

 

(930

)

 

 

425

 

Provision for unfunded loans

 

 

572

 

 

 

0

 

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

 

31,600

 

 

 

24,842

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

1,145

 

 

 

808

 

Bank owned life insurance income, including death benefit

 

 

409

 

 

 

284

 

Trust fees

 

 

2,519

 

 

 

2,236

 

Insurance agency commissions

 

 

1,047

 

 

 

1,003

 

Security (losses) gains, including fair value changes for equity securities

 

 

(11

)

 

 

488

 

Retirement plan consulting fees

 

 

397

 

 

 

320

 

Investment commissions

 

 

694

 

 

 

504

 

Net gains on sale of loans

 

 

1,129

 

 

 

2,900

 

Other mortgage banking income (loss), net

 

 

60

 

 

 

(115

)

Debit card and EFT fees

 

 

1,416

 

 

 

1,171

 

Legal settlement

 

 

8,400

 

 

 

0

 

Other operating income

 

 

493

 

 

 

533

 

TOTAL NONINTEREST INCOME

 

 

17,698

 

 

 

10,132

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,831

 

 

 

9,976

 

Occupancy and equipment

 

 

2,680

 

 

 

2,275

 

State and local taxes

 

 

678

 

 

 

554

 

Professional fees

 

 

3,135

 

 

 

1,056

 

Merger related costs

 

 

1,940

 

 

 

12

 

Advertising

 

 

392

 

 

 

260

 

FDIC insurance

 

 

267

 

 

 

170

 

Intangible amortization

 

 

420

 

 

 

316

 

Core processing charges

 

 

745

 

 

 

627

 

Charitable donation

 

 

6,000

 

 

 

0

 

Other operating expenses

 

 

2,368

 

 

 

2,071

 

TOTAL NONINTEREST EXPENSES

 

 

30,456

 

 

 

17,317

 

INCOME BEFORE INCOME TAXES

 

 

18,842

 

 

 

17,657

 

INCOME TAXES

 

 

2,998

 

 

 

3,101

 

NET INCOME

 

$

15,844

 

 

$

14,556

 

EARNINGS PER SHARE - basic

 

$

0.47

 

 

$

0.52

 

EARNINGS PER SHARE - fully diluted

 

$

0.47

 

 

$

0.51

 

 

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,

2022

 

 

March 31,

2021

 

NET INCOME

 

$

15,844

 

 

$

14,556

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Net unrealized holding losses on available for sale securities

 

 

(112,398

)

 

 

(14,934

)

Reclassification adjustment for (gains) realized in income

 

 

0

 

 

 

(383

)

Net unrealized holding losses

 

 

(112,398

)

 

 

(15,317

)

Income tax effect

 

 

23,605

 

 

 

3,217

 

Unrealized holding losses, net of reclassification and tax

 

 

(88,793

)

 

 

(12,100

)

Change in funded status of post-retirement plan, net of tax

 

 

(2

)

 

 

0

 

Other comprehensive loss, net of tax

 

 

(88,795

)

 

 

(12,100

)

TOTAL COMPREHENSIVE INCOME (LOSS)

 

$

(72,951

)

 

$

2,456

 

 

See accompanying notes

 

4

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

(Table Dollar Amounts in Thousands except Per Share Data)

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Common

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

(Unaudited)

Stock

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance December 31, 2021

$

306,123

 

 

$

173,896

 

 

$

9,295

 

 

$

(16,882

)

 

$

472,432

 

   Net income

 

 

 

 

 

15,844

 

 

 

 

 

 

 

 

 

 

 

15,844

 

   Other comprehensive loss

 

 

 

 

 

 

 

 

 

(88,795

)

 

 

 

 

 

 

(88,795

)

   Restricted share issuance

 

(1,030

)

 

 

 

 

 

 

 

 

 

 

1,030

 

 

 

0

 

   Stock based compensation expense

 

365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

365

 

   Vesting of Long Term Incentive Plan

 

(788

)

 

 

 

 

 

 

 

 

 

 

368

 

 

 

(420

)

   Share forfeitures for taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

(102

)

 

 

(102

)

   Dividends paid at $0.16 per share

 

 

 

 

 

(5,438

)

 

 

 

 

 

 

 

 

 

 

(5,438

)

Balance March 31, 2022

$

304,670

 

 

$

184,302

 

 

$

(79,500

)

 

$

(15,586

)

 

$

393,886

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

Common

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

 

 

 

(Unaudited)

Stock

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Total

 

Balance December 31, 2020

 

208,763

 

 

 

138,073

 

 

 

22,032

 

 

 

(18,771

)

 

 

350,097

 

   Net income

 

 

 

 

 

14,556

 

 

 

 

 

 

 

 

 

 

 

14,556

 

   Other comprehensive loss

 

 

 

 

 

 

 

 

 

(12,100

)

 

 

 

 

 

 

(12,100

)

   Stock based compensation expense

 

330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

330

 

   Vesting of Long Term Incentive Plan

 

(894

)

 

 

 

 

 

 

 

 

 

 

894

 

 

 

0

 

   Share forfeitures for taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

(366

)

 

 

(366

)

   Cumulative impact of ASU 2016-13 adoption (CECL)

 

 

 

 

 

(1,936

)

 

 

 

 

 

 

 

 

 

 

(1,936

)

   Dividends paid at $0.11 per share

 

 

 

 

 

(3,110

)

 

 

 

 

 

 

 

 

 

 

(3,110

)

   Treasury share purchases

 

 

 

 

 

 

 

 

 

 

 

 

 

(116

)

 

 

(116

)

Balance March 31, 2021

$

208,199

 

 

$

147,583

 

 

$

9,932

 

 

$

(18,359

)

 

$

347,355

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

2022

 

 

March 31,

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

15,844

 

 

$

14,556

 

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

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

(930

)

 

 

425

 

Provision for unfunded loans

 

 

572

 

 

 

0

 

Depreciation and amortization

 

 

1,162

 

 

 

798

 

Net amortization of securities

 

 

1,378

 

 

 

618

 

Available for sale security gain

 

 

0

 

 

 

(383

)

Realized (gains) losses on equity securities

 

 

11

 

 

 

(105

)

Loss on premises and equipment sales and disposals, net

 

 

112

 

 

 

52

 

Stock compensation expense

 

 

365

 

 

 

330

 

Earnings on bank owned life insurance

 

 

(409

)

 

 

(284

)

Origination of loans held for sale

 

 

(41,419

)

 

 

(51,990

)

Proceeds from loans held for sale

 

 

45,369

 

 

 

55,948

 

Net gains on sale of loans

 

 

(1,129

)

 

 

(2,900

)

Net change in other assets and liabilities

 

 

(7,727

)

 

 

(10,028

)

NET CASH FROM OPERATING ACTIVITIES

 

 

13,199

 

 

 

7,037

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

22,712

 

 

 

17,155

 

Proceeds from sales of securities available for sale

 

 

0

 

 

 

26,186

 

Purchases of securities available for sale

 

 

(172,437

)

 

 

(241,345

)

Proceeds from sales of equity securities

 

 

18

 

 

 

20

 

Purchase of equity securities

 

 

(17

)

 

 

(25

)

Proceeds from maturities and repayments of SBIC funds

 

 

454

 

 

 

285

 

Purchases of SBIC funds

 

 

(454

)

 

 

(196

)

Proceeds from redemption of regulatory stock

 

 

0

 

 

 

253

 

Purchase of regulatory stock

 

 

(3,572

)

 

 

(22

)

Loan originations and payments, net

 

 

24,098

 

 

 

42,976

 

Proceeds from land and building sales

 

 

21

 

 

 

0

 

Additions to premises and equipment

 

 

(346

)

 

 

(219

)

NET CASH FROM INVESTING ACTIVITIES

 

 

(129,523

)

 

 

(154,932

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

146,576

 

 

 

222,176

 

Net change in short-term borrowings

 

 

0

 

 

 

2,689

 

Repayment of long-term borrowings

 

 

0

 

 

 

(1,980

)

Cash dividends paid

 

 

(5,415

)

 

 

(3,110

)

Repurchase of common shares

 

 

0

 

 

 

(116

)

NET CASH FROM FINANCING ACTIVITIES

 

 

141,161

 

 

 

219,659

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

24,837

 

 

 

71,764

 

Beginning cash and cash equivalents

 

 

112,790

 

 

 

254,621

 

Ending cash and cash equivalents

 

$

137,627

 

 

$

326,385

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

1,498

 

 

$

2,597

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

0

 

 

$

30

 

Security purchases not settled

 

$

0

 

 

$

44,814

 

Issuance of stock awards

 

$

1,398

 

 

$

894

 

 

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 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 2021 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”).  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, 2022.  Outstanding shares at March 31, 2022 were 34,007,677.

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 and changes in the funded status of the post-retirement plan, which are recognized as components of stockholders’ equity, net of tax effect.

7

 

Updates to Significant Accounting Policies:

New Accounting Standard:

On March 31, 2022, FASB issued ASU 2022-2, which eliminates the troubled debt restructuring (“TDR”), accounting model for creditors that have adopted Topic 326, Financial Instruments – Credit Losses.”  Due to the removal of the TDR accounting model, all loan modifications now will be accounted for under the general loan modification guidance in Subtopic 310-20.  In addition, on a prospective basis, entities will be subject to new disclosure requirements covering modifications of receivables to borrowers experiencing financial difficulty.  Public business entities within the scope of the Topic 326 vintage disclosure requirements also will be required to prospectively disclose current-period gross write-off information by vintage, or year of origination.  For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after December 15, 2022.  Early adoption is permitted.  The Company has not elected to early adopt this ASU at this time.  The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

Business Combinations:

On March 23, 2022, Farmers entered into an agreement and plan of merger with Emclaire Financial (“Emclaire”), the parent company of The Farmers National Bank of Emlenton (“Emlenton”).  The transaction is subject to receipt of Emclaire shareholder approval and customary regulatory approvals and is expected to close in the second half of 2022.  The transaction will create a large expansion in Pennsylvania and into the Pittsburgh market.  Emclaire operates 19 branches in ten counties throughout western Pennsylvania.  As of March 31, 2022, Emclaire had total assets of $1.1 billion, gross loans of $794.9 million, deposits of $936.0 million and equity of $86.7 million.

On November 1, 2021, the Company completed the merger with Cortland Bancorp (“Cortland”), the parent company of The Cortland Savings and Banking Company (“Cortland Bank”), pursuant to the Agreement and Plan of Merger, dated as of June 22, 2021, as amended by that certain Amendment to Agreement and Plan of Merger, dated October 12, 2021 (collectively, the “Merger Agreement”), by and among the Company, Cortland, and FMNB Merger Subsidiary IV, LLC, a wholly-owned subsidiary of the Company (“Merger Sub”).  Pursuant to the terms of the Merger Agreement, on November 1, 2021, Cortland merged with and into Merger Sub (the “Merger”), with Merger Sub as the surviving entity in the Merger.  Promptly following the consummation of the Merger, Merger Sub was dissolved and liquidated and Cortland Bank merged with and into the Bank (the “Bank Merger”), with the Bank as the surviving bank in the Bank Merger.  The transaction received the approval of Cortland’s shareholders and all customary regulatory approvals.  Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each common share, without par value, of Cortland issued and outstanding immediately prior to the effective time (except for certain Cortland common shares held directly by Cortland or the Company) was converted into the right to receive, without interest, $28.00 per share in cash or 1.75 shares of the Company’s common stock, subject to an overall limitation of 75% of the Cortland shares being exchanged for the Company’s shares and the remaining 25% being exchanged for cash.  The Company issued 5.6 million shares of its common stock along with cash of $29.6 million, which represented a transaction value of approximately $128.5 million based on its closing stock price of $17.82 on October 31, 2021, the closing of the Merger.                                                                                        

In accordance with ASC 805, the Company expensed approximately $1.9 million of merger related costs during the period ended March 31, 2022, in addition to $7.1 million expensed in the year ended 2021.  The Company recorded goodwill of $48.5 million as a result of the combination.  Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies, including the reduction of  personnel and overlapping contracts, expected to be derived from the Company’s strategy to enhance and expand its presence in northeast Ohio.  The merger offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area.  The goodwill was determined not to be deductible for income tax purposes.

8

 

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

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

29,618

 

Stock

 

98,921

 

Fair value of total consideration transferred

$

128,539

 

Fair value of assets acquired

 

 

 

Cash and cash equivalents

$

113,391

 

Securities available for sale

 

130,574

 

Other investments

 

16,092

 

Loans

 

482,168

 

Premises and equipment

 

12,644

 

Bank owned life insurance

 

21,547

 

Core deposit intangible

 

5,886

 

Current and deferred taxes

 

3,135

 

Other assets

 

7,805

 

Total assets acquired

 

793,242

 

Fair value of liabilities assumed

 

 

 

Deposits

 

695,274

 

Short-term borrowings

 

4,246

 

Long-term borrowings

 

4,262

 

Accrued interest payable and other liabilities

 

9,386

 

Total liabilities

 

713,168

 

Net assets acquired

$

80,074

 

Goodwill created

 

48,465

 

Total net assets acquired

$

128,539

 

 

 

Securities:

The following table summarizes the amortized cost and fair value of the available for sale investment securities portfolio at March 31, 2022 and December 31, 2021 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

114,063

 

 

$

3

 

 

$

(9,119

)

 

$

104,947

 

State and political subdivisions

 

681,567

 

 

 

5,274

 

 

 

(41,233

)

 

 

645,608

 

Corporate bonds

 

4,399

 

 

 

4

 

 

 

(108

)

 

 

4,295

 

Mortgage-backed securities - residential

 

718,295

 

 

 

117

 

 

 

(54,717

)

 

 

663,695

 

Collateralized mortgage obligations - residential

 

41,039

 

 

 

21

 

 

 

(735

)

 

 

40,325

 

Small Business Administration

 

4,943

 

 

 

0

 

 

 

(187

)

 

 

4,756

 

Totals

$

1,564,306

 

 

$

5,419

 

 

$

(106,099

)

 

$

1,463,626

 

9

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

(In Thousands of Dollars)

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

$

93,137

 

 

$

32

 

 

$

(2,338

)

 

$

90,831

 

State and political subdivisions

 

636,724

 

 

 

23,296

 

 

 

(1,205

)

 

 

658,815

 

Corporate bonds

 

4,009

 

 

 

50

 

 

 

(29

)

 

 

4,030

 

Mortgage-backed securities - residential

 

663,405

 

 

 

1,875

 

 

 

(10,094

)

 

 

655,186

 

Collateralized mortgage obligations - residential

 

13,303

 

 

 

153

 

 

 

(71

)

 

 

13,385

 

Small Business Administration

 

5,381

 

 

 

49

 

 

 

0

 

 

 

5,430

 

Totals

$

1,415,959

 

 

$

25,455

 

 

$

(13,737

)

 

$

1,427,677

 

 

There were no sales of securities in the first quarter ended March 31, 2022.  Proceeds from the sale of portfolio securities were $26.2 million during the three month period ended March 31, 2021.  Gross gains of $406 thousand and gross losses of $23 thousand were realized on these sales during the three month period ended March 31, 2021.  In addition, $11 thousand of realized losses and $105 thousand of realized gains on equity securities were recognized in the income statement during the three month periods ended March 31, 2022 and March 31, 2021, respectively.

The amortized cost and fair value of the debt securities portfolio are shown in the table below 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, 2022

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

1,213

 

 

$

1,215

 

One to five years

 

 

14,507

 

 

 

14,683

 

Five to ten years

 

 

152,628

 

 

 

143,677

 

Beyond ten years

 

 

631,681

 

 

 

595,275

 

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

 

 

764,277

 

 

 

708,776

 

Total

 

$

1,564,306

 

 

$

1,463,626

 

 

 

The following table summarizes the available for sale investment securities with unrealized losses at March 31, 2022 and December 31, 2021, 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

94,866

 

 

$

(8,125

)

 

$

9,753

 

 

$

(994

)

 

$

104,619

 

 

$

(9,119

)

State and political subdivisions

 

 

420,523

 

 

 

(38,939

)

 

 

14,420

 

 

 

(2,294

)

 

 

434,943

 

 

 

(41,233

)

Corporate bonds

 

 

1,009

 

 

 

(38

)

 

 

670

 

 

 

(70

)

 

 

1,679

 

 

 

(108

)

Mortgage-backed securities - residential

 

 

511,033

 

 

 

(42,169

)

 

 

110,117

 

 

 

(12,548

)

 

 

621,150

 

 

 

(54,717

)

Collateralized mortgage obligations - residential

 

 

18,856

 

 

 

(735

)

 

 

0

 

 

 

0

 

 

 

18,856

 

 

 

(735

)

Small Business Administration

 

 

4,756

 

 

 

(187

)

 

 

0

 

 

 

0

 

 

 

4,756

 

 

 

(187

)

Total temporarily impaired

 

$

1,051,043

 

 

$

(90,193

)

 

$

134,960

 

 

$

(15,906

)

 

$

1,186,003

 

 

$

(106,099

)

10

 

 

 

 

 

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

81,236

 

 

$

(1,960

)

 

$

8,271

 

 

$

(378

)

 

$

89,507

 

 

$

(2,338

)

State and political subdivisions

 

 

103,651

 

 

 

(1,020

)

 

 

10,020

 

 

 

(185

)

 

 

113,671

 

 

 

(1,205

)

Corporate bonds

 

 

418

 

 

 

(2

)

 

 

715

 

 

 

(27

)

 

 

1,133

 

 

 

(29

)

Mortgage-backed securities - residential

 

 

525,792

 

 

 

(7,872

)

 

 

55,569

 

 

 

(2,222

)

 

 

581,361

 

 

 

(10,094

)

Collateralized mortgage obligations - residential

 

 

7,270

 

 

 

(71

)

 

 

0

 

 

 

0

 

 

 

7,270

 

 

 

(71

)

Total temporarily impaired

 

$

718,367

 

 

$

(10,925

)

 

$

74,575

 

 

$

(2,812

)

 

$

792,942

 

 

$

(13,737

)

 

Allowance for Credit Losses

The Company adopted ASU 2016-13 prior to 2021, which made improvements to the accounting for credit losses on securities available for sale.  During the 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, 2022, the Company’s security portfolio consisted of 879 securities, 595 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 mortgage-backed securities and state and political subdivisions.  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, 2022 the Company has not recorded an allowance for credit losses on AFS securities.

 

Loans:

Loan balances were as follows:

 

(In Thousands of Dollars)

 

March 31, 2022

 

 

December 31, 2021

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner occupied

 

$

347,173

 

 

$

340,369

 

Non-owner occupied

 

 

540,194

 

 

 

533,240

 

Farmland

 

 

173,568

 

 

 

177,706

 

Other

 

 

113,605

 

 

 

138,282

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

298,903

 

 

 

313,836

 

Agricultural

 

 

51,277

 

 

 

54,659

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

455,501

 

 

 

453,635

 

Home equity lines of credit

 

 

128,221

 

 

 

127,433

 

Consumer

 

 

 

 

 

 

 

 

Indirect

 

 

167,147

 

 

 

159,006

 

Direct

 

 

18,859

 

 

 

21,121

 

Other

 

 

6,580

 

 

 

9,395

 

Total originated loans

 

$

2,301,028

 

 

$

2,328,682

 

Net Deferred loan (fees) costs

 

 

3,943

 

 

 

2,400

 

Allowance for credit losses

 

 

(27,015

)

 

 

(29,386

)

Net loans

 

$

2,277,956

 

 

$

2,301,696

 

 

11

 

 

Allowance for credit loss activity

The following tables present the activity in the allowance for credit losses by portfolio segment for the three month period ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022

 

(In Thousands of Dollars)

 

Commercial

Real Estate

 

 

Commercial

 

 

Residential

Real Estate

 

 

Consumer

 

 

Total

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

15,879

 

 

$

4,949

 

 

$

4,870

 

 

$

3,688

 

 

$

29,386

 

Provision for credit losses

 

 

(672

)

 

 

271

 

 

 

(146

)

 

 

(383

)

 

 

(930

)

Loans charged off

 

 

0

 

 

 

(1,359

)

 

 

(34

)

 

 

(197

)

 

 

(1,590

)

Recoveries

 

 

0

 

 

 

6

 

 

 

12

 

 

 

131

 

 

 

149

 

Total ending allowance balance

 

$

15,207

 

 

$

3,867

 

 

$

4,702

 

 

$

3,239

 

 

$

27,015

 

 

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

 

 

 

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, 2022 and December 31, 2021:

 

 

 

March 31, 2022

 

 

December 31, 2021

 

(In Thousands of Dollars)

 

Nonaccrual

 

 

Loans Past

Due 90 Days

or More

Still Accruing

 

 

Nonaccrual

 

 

Loans Past

Due 90 Days

or More

Still Accruing

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

416

 

 

$

0

 

 

$

433

 

 

$

0

 

Non-owner occupied

 

 

2,477

 

 

 

0

 

 

 

2,511

 

 

 

0

 

Farmland

 

 

271

 

 

 

0

 

 

 

274

 

 

 

0

 

Other

 

 

53

 

 

 

0

 

 

 

60

 

 

 

0

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

5,534

 

 

 

2

 

 

 

7,190

 

 

 

54

 

Agricultural

 

 

43

 

 

 

0

 

 

 

40

 

 

 

0

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,940

 

 

 

671

 

 

 

3,363

 

 

 

459

 

Home equity lines of credit

 

 

928

 

 

 

0

 

 

 

917

 

 

 

36

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

456

 

 

 

52

 

 

 

455

 

 

 

123

 

Direct

 

 

180

 

 

 

23

 

 

 

227

 

 

 

53

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total loans

 

$

13,298

 

 

$

748

 

 

$

15,470

 

 

$

725

 

 

12

 

 

The following tables present the aging of the recorded investment in past due loans as of March 31, 2022 and December 31, 2021 by class of loans.  Note that loans on a modification to defer payments under the CARES Act are included in loans not past due for the period ending December 31, 2021.  There were no loans on deferred payments at March 31, 2022.

 

(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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

68

 

 

$

0

 

 

$

416

 

 

$

484

 

 

$

346,298

 

 

$

346,782

 

Non-owner occupied

 

 

1

 

 

 

0

 

 

 

2,477

 

 

 

2,478

 

 

 

537,157

 

 

 

539,635

 

Farmland

 

 

0

 

 

 

0

 

 

 

271

 

 

 

271

 

 

 

173,000

 

 

 

173,271

 

Other

 

 

0

 

 

 

0

 

 

 

53

 

 

 

53

 

 

 

113,294

 

 

 

113,347

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

185

 

 

 

5

 

 

 

5,536

 

 

 

5,726

 

 

 

292,823

 

 

 

298,549

 

Agricultural

 

 

137

 

 

 

53

 

 

 

43

 

 

 

233

 

 

 

51,296

 

 

 

51,529

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

5,583

 

 

 

71

 

 

 

3,611

 

 

 

9,265

 

 

 

445,497

 

 

 

454,762

 

Home equity lines of credit

 

 

138

 

 

 

23

 

 

 

928

 

 

 

1,089

 

 

 

127,154

 

 

 

128,243

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

479

 

 

 

268

 

 

 

508

 

 

 

1,255

 

 

 

172,096

 

 

 

173,351

 

Direct

 

 

242

 

 

 

50

 

 

 

203

 

 

 

495

 

 

 

18,427

 

 

 

18,922

 

Other

 

 

1

 

 

 

0

 

 

 

0

 

 

 

1

 

 

 

6,579

 

 

 

6,580

 

Total loans

 

$

6,834

 

 

$

470

 

 

$

14,046

 

 

$

21,350

 

 

$

2,283,621

 

 

$

2,304,971

 

 

(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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

70

 

 

$

591

 

 

$

433

 

 

$

1,094

 

 

$

338,880

 

 

$

339,974

 

Non-owner occupied

 

 

394

 

 

 

311

 

 

 

2,511

 

 

 

3,216

 

 

 

529,490

 

 

 

532,706

 

Farmland

 

 

0

 

 

 

0

 

 

 

274

 

 

 

274

 

 

 

177,143

 

 

 

177,417

 

Other

 

 

56

 

 

 

0

 

 

 

60

 

 

 

116

 

 

 

137,878

 

 

 

137,994

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

256

 

 

 

100

 

 

 

7,244

 

 

 

7,600

 

 

 

304,932

 

 

 

312,532

 

Agricultural

 

 

100

 

 

 

28

 

 

 

40

 

 

 

168

 

 

 

54,706

 

 

 

54,874

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

4,452

 

 

 

1,077

 

 

 

3,822

 

 

 

9,351

 

 

 

443,441

 

 

 

452,792

 

Home equity lines of credit

 

 

80

 

 

 

12

 

 

 

953

 

 

 

1,045

 

 

 

126,405

 

 

 

127,450

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

795

 

 

 

275

 

 

 

578

 

 

 

1,648

 

 

 

163,112

 

 

 

164,760

 

Direct

 

 

203

 

 

 

91

 

 

 

280

 

 

 

574

 

 

 

20,614

 

 

 

21,188

 

Other

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

9,395

 

 

 

9,395

 

Total loans

 

$

6,406

 

 

$

2,485

 

 

$

16,195

 

 

$

25,086

 

 

$

2,305,996

 

 

$

2,331,082

 

 

 

Troubled Debt Restructurings

Total troubled debt restructurings were $3.8 million and $3.9 million at March 31, 2022, and December 31, 2021, respectively.  The Company has allocated $111 thousand and $109 thousand of specific reserves to loans whose terms have been modified in troubled debt restructurings at March 31, 2022, and December 31, 2021, respectively.  There were no commitments to lend additional amounts to borrowers with loans that were classified as troubled debt restructurings at March 31, 2022, and at December 31, 2021.

13

 

During the three month periods ended March 31, 2022 and 2021, 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, 2022, the terms of such loans included a reduction of the stated interest rate of the loan of 3.345%.  During the same three month period in 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.        

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ended March 31, 2022 and 2021:

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Three Months Ended March 31, 2022

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

1-4 family residential

 

 

1

 

 

$

50

 

 

$

52

 

Home equity lines of credit

 

 

1

 

 

 

14

 

 

 

14

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

1

 

 

 

14

 

 

 

14

 

Total loans

 

 

3

 

 

$

78

 

 

$

80

 

 

 

 

 

 

 

 

Pre-

Modification

 

 

Post-

Modification

 

Three Months Ended March 31, 2021

 

Number of

 

 

Outstanding

Recorded

 

 

Outstanding

Recorded

 

(In Thousands of Dollars)

 

Loans

 

 

Investment

 

 

Investment

 

Commercial

 

 

4

 

 

$

22

 

 

$

22

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1

 

 

 

69

 

 

 

73

 

Home equity lines of credit

 

 

1

 

 

 

31

 

 

 

31

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Indirect

 

 

6

 

 

 

87

 

 

 

87

 

Total loans

 

 

12

 

 

$

209

 

 

$

213

 

 

There were no charge offs and no increase to the provision for credit losses during the three month period ended March 31, 2022 and  $20 thousand in charge offs and a $20 thousand increase to the provision for credit losses during the three month period ended March 31, 2021, 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, 2022.  The loan was not past due at March 31, 2022.  There was no provision recorded as a result of the defaults during 2022.  A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

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.    

 

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 throughout 2021. The range of deferred months for subsequent requests were three to twelve months. The decline in deferred loans and balances was due to borrowers not requesting additional deferments and most continued to pay under the original terms of their loan. As of March 31, 2022 there are no longer borrowers on deferment due to COVID-19 related issues.

 

14

 

 

Farmers is also a preferred U.S. Small Business Administration (“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 Paycheck Protection Program (“PPP”) under the 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 2,134 business customers totaling $256.4 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.  During the period ended March 31, 2022, the Company has received life to date payments from the SBA for forgiveness of loans totaling $256.3 million, or approximately 99.98% of the PPP loans originated in 2020. The Company processed $107.9 million in new loans for PPP loan funding during 2021. The Company has also received payments from the SBA for forgiveness of loans totaling $84.9 million, or approximately 78.7%, of PPP loans originated in 2021.

 

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 $1 million, 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.

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, 2022 and December 31, 2021, 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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

338,256

 

 

$

4,430

 

 

$

4,096

 

 

$

346,782

 

Non-owner occupied

 

 

506,509

 

 

 

14,708

 

 

 

18,418

 

 

 

539,635

 

Farmland

 

 

170,456

 

 

 

2,145

 

 

 

670

 

 

 

173,271

 

Other

 

 

112,473

 

 

 

499

 

 

 

375

 

 

 

113,347

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

289,651

 

 

 

1,308

 

 

 

7,590

 

 

 

298,549

 

Agricultural

 

 

50,936

 

 

 

507

 

 

 

86

 

 

 

51,529

 

Total loans

 

$

1,468,281

 

 

$

23,597

 

 

$

31,235

 

 

$

1,523,113

 

15

 

 

 

(In Thousands of Dollars)

 

Pass

 

 

Special

Mention

 

 

Sub

standard

 

 

Total

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

$

330,754

 

 

$

5,006

 

 

$

4,214

 

 

$

339,974

 

Non-owner occupied

 

 

495,170

 

 

 

19,366

 

 

 

18,170

 

 

 

532,706

 

Farmland

 

 

174,580

 

 

 

2,160

 

 

 

677

 

 

 

177,417

 

Other

 

 

137,063

 

 

 

784

 

 

 

147

 

 

 

137,994

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

301,879

 

 

 

1,190

 

 

 

9,463

 

 

 

312,532

 

Agricultural

 

 

54,394

 

 

 

397

 

 

 

83

 

 

 

54,874

 

Total loans

 

$

1,493,840

 

 

$

28,903

 

 

$

32,754

 

 

$

1,555,497

 

 

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, 2022, other real estate owned and foreclosure properties were $0 and $216 thousand, respectively.  At December 31, 2021, other real estate owned and foreclosure properties were $0 and $93 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, 2022 and December 31, 2021.  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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

451,151

 

 

$

127,315

 

 

$

172,843

 

 

$

18,719

 

 

$

6,580

 

Nonperforming

 

 

3,611

 

 

 

928

 

 

 

508

 

 

 

203

 

 

 

0

 

Total loans

 

$

454,762

 

 

$

128,243

 

 

$

173,351

 

 

$

18,922

 

 

$

6,580

 

 

 

 

Residential Real Estate

 

 

Consumer

 

(In Thousands of Dollars)

 

1-4 Family

Residential

 

 

Home

Equity Lines

of Credit

 

 

Indirect

 

 

Direct

 

 

Other

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

448,970

 

 

$

126,497

 

 

$

164,182

 

 

$

20,908

 

 

$

9,395

 

Nonperforming

 

 

3,822

 

 

 

953

 

 

 

578

 

 

 

280

 

 

 

6

 

Total loans

 

$

452,792

 

 

$

127,450

 

 

$

164,760

 

 

$

21,188

 

 

$

9,401

 

 

16

 

 

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, 2022

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving Loans

 

 

Total

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

34,484

 

 

$

170,585

 

 

$

141,201

 

 

$

163,632

 

 

$

114,598

 

 

$

314,075

 

 

$

18,663

 

 

$

957,238

 

Special mention

 

 

0

 

 

 

788

 

 

 

0

 

 

 

6,924

 

 

 

2,020

 

 

 

9,387

 

 

 

518

 

 

 

19,637

 

Substandard

 

 

40

 

 

 

0

 

 

 

661

 

 

 

2,648

 

 

 

492

 

 

 

18,441

 

 

 

607

 

 

 

22,889

 

Total commercial real estate loans

 

$

34,524

 

 

$

171,373

 

 

$

141,862

 

 

$

173,204

 

 

$

117,110

 

 

$

341,903

 

 

$

19,788

 

 

$

999,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

28,559

 

 

$

80,860

 

 

$

46,807

 

 

$

25,005

 

 

$

20,084

 

 

$

24,321

 

 

$

64,015

 

 

$

289,651

 

Special mention

 

 

0

 

 

 

533

 

 

 

103

 

 

 

122

 

 

 

31

 

 

 

2

 

 

 

517

 

 

 

1,308

 

Substandard

 

 

399

 

 

 

1,984

 

 

 

1,676

 

 

 

265

 

 

 

257

 

 

 

1,890

 

 

 

1,119

 

 

 

7,590

 

Total commercial loans

 

$

28,958

 

 

$

83,377

 

 

$

48,586

 

 

$

25,392

 

 

$

20,372

 

 

$

26,213

 

 

$

65,651

 

 

$

298,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

9,435

 

 

$

42,324

 

 

$

49,368

 

 

$

27,039

 

 

$

27,002

 

 

$

51,111

 

 

$

15,113

 

 

$

221,392

 

Special mention

 

 

0

 

 

 

0

 

 

 

227

 

 

 

31

 

 

 

0

 

 

 

2,045

 

 

 

349

 

 

 

2,652

 

Substandard

 

 

0

 

 

 

365

 

 

 

17

 

 

 

58

 

 

 

11

 

 

 

275

 

 

 

30

 

 

 

756

 

Total agricultural loans

 

$

9,435

 

 

$

42,689

 

 

$

49,612

 

 

$

27,128

 

 

$

27,013

 

 

$

53,431

 

 

$

15,492

 

 

$

224,800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

19,699

 

 

$

102,254

 

 

$

86,118

 

 

$

36,861

 

 

$

29,617

 

 

$

167,930

 

 

$

3,706

 

 

$

446,185

 

Special mention

 

 

0

 

 

 

0

 

 

 

73

 

 

 

127

 

 

 

80

 

 

 

139

 

 

 

0

 

 

 

419

 

Substandard

 

 

0

 

 

 

46

 

 

 

100

 

 

 

89

 

 

 

30

 

 

 

7,893

 

 

 

0

 

 

 

8,158

 

Total residential real estate loans

 

$

19,699

 

 

$

102,300

 

 

$

86,291

 

 

$

37,077

 

 

$

29,727

 

 

$

175,962

 

 

$

3,706

 

 

$

454,762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

0

 

 

$

0

 

 

$

149

 

 

$

0

 

 

$

19

 

 

$

1,744

 

 

$

124,320

 

 

$

126,232

 

Special mention

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

48

 

 

 

48

 

Substandard

 

 

0

 

 

 

13

 

 

 

12

 

 

 

51

 

 

 

143

 

 

 

1,626

 

 

 

118

 

 

 

1,963

 

Total home equity lines of credit

 

$

0

 

 

$

13

 

 

$

161

 

 

$

51

 

 

$

162

 

 

$

3,370

 

 

$

124,486

 

 

$

128,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk Rating

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

24,827

 

 

$

58,540

 

 

$

42,425

 

 

$

30,910

 

 

$

18,087

 

 

$

17,561

 

 

$

5,408

 

 

$

197,758

 

Substandard

 

 

0

 

 

 

120

 

 

 

261

 

 

 

253

 

 

 

102

 

 

 

359

 

 

 

0

 

 

 

1,095

 

Total consumer loans

 

$

24,827

 

 

$

58,660

 

 

$

42,686

 

 

$

31,163

 

 

$

18,189

 

 

$

17,920

 

 

$

5,408

 

 

$

198,853

 

 

  

17

 

 

Purchased Loans

As a result of the Cortland Merger, the Company acquired $478.2 million in loans, excluding $4.0 million of loans held for sale.

Under ASU Topic 326, when loans are purchased with evidence of more than significant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”).  PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded.  In addition, an adjustment is made to the ACL for the expected loss on the acquisition date.  These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement.  During 2021, the Company acquired PCD loans with a fair value of $34.3 million, credit discount of $1.3 million and a noncredit discount of $1.1 million.  The outstanding balance at March 31, 2022 and related allowance on these loans is as follows:

 

 

 

Loan Balance

 

 

ACL Balance

 

Commercial real estate

 

 

 

 

 

 

 

 

Owner Occupied

 

$

2,531

 

 

$

82

 

Non-owner Occupied

 

 

20,017

 

 

 

890

 

Other

 

 

780

 

 

 

36

 

 

 

 

23,328

 

 

 

1,008

 

Commercial

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,775

 

 

 

106

 

Residential real estate

 

 

 

 

 

 

 

 

1-4 family residential

 

 

500

 

 

 

4

 

 

 

 

 

 

 

 

 

 

Total

 

$

25,603

 

 

$

1,118

 

 

 

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, 2022 and 2021.

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Totals

 

For Three Months Ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

$

0

 

 

$

1,145

 

 

$

1,145

 

Debit card and EFT fees

 

 

0

 

 

 

1,416

 

 

 

1,416

 

Trust fees

 

 

2,519

 

 

 

0

 

 

 

2,519

 

Insurance agency commissions

 

 

0

 

 

 

1,047

 

 

 

1,047

 

Retirement plan consulting fees

 

 

397

 

 

 

0

 

 

 

397

 

Investment commissions

 

 

0

 

 

 

694

 

 

 

694

 

Other (outside the scope of ASC 606)

 

 

0

 

 

 

10,480

 

 

 

10,480

 

Total noninterest income

 

$

2,916

 

 

$

14,782

 

 

$

17,698

 

 

(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

 

 

 

1,171

 

 

 

1,171

 

Trust fees

 

 

2,236

 

 

 

0

 

 

 

2,236

 

Insurance agency commissions

 

 

0

 

 

 

1,003

 

 

 

1,003

 

Retirement plan consulting fees

 

 

320

 

 

 

0

 

 

 

320

 

Investment commissions

 

 

0

 

 

 

504

 

 

 

504

 

Other (outside the scope of ASC 606)

 

 

0

 

 

 

4,090

 

 

 

4,090

 

Total noninterest income

 

$

2,556

 

 

$

7,576

 

 

$

10,132

 

 

18

 

 

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 and 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 2.1% 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 the third party broker dealer.  Investment commissions represent only 1.4% 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.  

19

 

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. There is also a one-time legal settlement of $8.4 million for the three month period ended March 31, 2022.  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 values securities using 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 exit pricing, 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, 2022 and for the year ended December 31, 2021, 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: Fair value estimates of collateral dependent loans that are individually reviewed are based on the fair value of the collateral, less estimated costs to sell.  Non-collateral dependent loans are valued based on discounted cash flows.  Loans carried at fair value generally receive specific allocations of the allowance for credit losses in the current period 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.  These loans are evaluated on a quarterly basis 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.

20

 

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, 2022 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

 

$

104,947

 

 

$

0

 

 

$

104,947

 

 

$

0

 

State and political subdivisions

 

 

645,608

 

 

 

0

 

 

 

645,608

 

 

 

0

 

Corporate bonds

 

 

4,295

 

 

 

0

 

 

 

4,295

 

 

 

0

 

Mortgage-backed securities-residential

 

 

663,695

 

 

 

0

 

 

 

663,693

 

 

 

2

 

Collateralized mortgage obligations

 

 

40,325

 

 

 

0

 

 

 

40,325

 

 

 

0

 

Small Business Administration

 

 

4,756

 

 

 

0

 

 

 

4,756

 

 

 

0

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities at fair value

 

 

217

 

 

 

217

 

 

 

0

 

 

 

0

 

Other investments measured at net asset value

 

 

14,723

 

 

n/a

 

 

n/a

 

 

n/a

 

Total investment securities

 

$

1,478,566

 

 

$

217

 

 

$

1,463,624

 

 

$

2

 

Interest rate swaps

 

$

2,232

 

 

$

0

 

 

$

2,232

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

2,232

 

 

$

0

 

 

$

2,232

 

 

$

0

 

 

 

 

 

 

 

 

Fair Value Measurements at December 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

 

$

90,831

 

 

$

0

 

 

$

90,831

 

 

$

0

 

State and political subdivisions

 

 

658,815

 

 

 

0

 

 

 

658,815

 

 

 

0

 

Corporate bonds

 

 

4,030

 

 

 

0

 

 

 

4,030

 

 

 

0

 

Mortgage-backed securities-residential

 

 

655,186

 

 

 

0

 

 

 

655,183

 

 

 

3

 

Collateralized mortgage obligations

 

 

13,385

 

 

 

0

 

 

 

13,385

 

 

 

0

 

Small Business Administration

 

 

5,430

 

 

 

0

 

 

 

5,430

 

 

 

0

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities at fair value

 

 

228

 

 

 

228

 

 

 

0

 

 

 

0

 

Other investments measured at net asset value

 

 

14,721

 

 

n/a

 

 

n/a

 

 

n/a

 

Total investment securities

 

$

1,442,626

 

 

$

228

 

 

$

1,427,674

 

 

$

3

 

Interest rate swaps

 

$

4,261

 

 

$

0

 

 

$

4,261

 

 

$

0

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

4,261

 

 

$

0

 

 

$

4,261

 

 

$

0

 

 

There were no significant transfers between Level 1 and Level 2 during the three month period ended March 31, 2022 and 2021.

 

21

 

 

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)

 

2022

 

 

2021

 

Beginning Balance

 

$

3

 

 

$

4

 

Transfers from level 2

 

 

0

 

 

 

0

 

Repayments, calls and maturities

 

 

(1

)

 

 

0

 

Ending Balance

 

$

2

 

 

$

4

 

 

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

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2022 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1–4 family residential

 

$

82

 

 

$

0

 

 

$

0

 

 

$

82

 

Consumer indirect

 

 

14

 

 

 

0

 

 

 

0

 

 

 

14

 

 

 

 

 

 

 

 

Fair Value Measurements at December 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually Evaluated loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

1,654

 

 

$

0

 

 

$

0

 

 

$

1,654

 

1–4 family residential

 

 

82

 

 

 

0

 

 

 

0

 

 

 

82

 

 

Collateral dependent loans were individually evaluated under ASC 326 for the periods ending March 31, 2022 and December 31, 2021.  Collateral dependent loans had a principal balance of $893 thousand with a valuation allowance of $797 thousand at March 31, 2022.  Collateral dependent loans had a principal balance of $3.2 million with a valuation allowance of $1.5 million at December 31, 2021.  Excluded from the above tables at March 31, 2022 and December 31, 2021, are $850 thousand and $792 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.

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, 2022 and December 31, 2021:

 

March 31, 2022

Fair value

 

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Individually evaluated loans

 

 

 

 

 

 

 

 

 

Residential

 

82

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(3.84%) - 3.22%

(0.12%)

Consumer indirect

 

14

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(6.08%) - 6.08%

0.00%

22

 

 

 

December 31, 2021

Fair value

 

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range

(Weighted Average)

Individually evaluated loans

 

 

 

 

 

 

 

 

 

Commercial

$

1,654

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(40.24%) - 56.83%

(12.43%)

Residential

 

82

 

 

Sales comparison

 

Adjustment for differences between comparable sales

 

(3.84%) - 3.22%

(0.12%)

 

The carrying amounts and estimated fair values of financial instruments not previously disclosed at March 31, 2022 and December 31, 2021 are as follows:

 

 

 

 

 

 

 

Fair Value Measurements at March 31, 2022 Using:

 

(In Thousands of Dollars)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

137,627

 

 

$

29,224

 

 

$

108,403

 

 

$

0

 

 

$

137,627

 

Regulatory stock

 

 

19,080

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

1,904

 

 

 

0

 

 

 

1,942

 

 

 

0

 

 

 

1,942

 

Loans, net

 

 

2,277,956

 

 

 

0

 

 

 

0

 

 

 

2,254,714

 

 

 

2,254,714

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,693,811

 

 

 

3,283,963

 

 

 

397,903

 

 

 

0

 

 

 

3,681,866

 

Long-term borrowings

 

 

87,872

 

 

 

0

 

 

 

84,946

 

 

 

0

 

 

 

84,946

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2021 Using:

 

(In Thousands of Dollars)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

112,790

 

 

$

29,150

 

 

$

83,640

 

 

$

0

 

 

$

112,790

 

Regulatory stock

 

 

15,510

 

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

Loans held for sale

 

 

4,545

 

 

 

0

 

 

 

4,681

 

 

 

0

 

 

 

4,681

 

Loans, net

 

 

2,301,696

 

 

 

0

 

 

 

0

 

 

 

2,285,554

 

 

 

2,285,554

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,547,235

 

 

 

3,158,967

 

 

 

384,263

 

 

 

0

 

 

 

3,543,230

 

Long-term borrowings

 

 

87,758

 

 

 

0

 

 

 

92,433

 

 

 

0

 

 

 

92,433

 

 

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 Level 1.

Regulatory Stock: It is not practical to determine the fair value of regulatory 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.  Fair value for collateral dependent loans is based upon appraised values adjusted for trends observed in the market, less estimated cost to sell. The cash flow method is used for estimating fair value for noncollateral dependent loans. 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.

23

 

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.

 

 

Goodwill and Intangible Assets:

 

Goodwill associated with the Company’s acquisition of Cortland in November 2021 and other past acquisitions totaled $94.2 million at March 31, 2022 and December 31, 2021.  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.  Results of the assessment indicated no goodwill impairment as of September 30, 2021.  The Company will continue to monitor its goodwill for possible impairment.  

Acquired Intangible Assets

Acquired intangible assets were as follows:

 

 

March 31, 2022

 

 

December 31, 2021

 

(In Thousands of Dollars)

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationship intangibles

$

7,210

 

 

$

(6,679

)

 

$

7,210

 

 

$

(6,641

)

Non-compete contracts

 

430

 

 

 

(393

)

 

 

430

 

 

 

(392

)

Trade name

 

520

 

 

 

(364

)

 

 

520

 

 

 

(356

)

Core deposit intangible

 

12,866

 

 

 

(5,643

)

 

 

12,866

 

 

 

(5,271

)

Total

$

21,026

 

 

$

(13,079

)

 

$

21,026

 

 

$

(12,660

)

 

Aggregate amortization expense was $420 thousand for the three month period ended March 31, 2022 and $316 thousand for the three month period ended March 31, 2021.

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

 

2022 (9 months)

$

1,251

 

2023

 

1,198

 

2024

 

894

 

2025

 

833

 

2026

 

741

 

Thereafter

 

3,030

 

Total

$

7,947

 

 

 

 

 

 

24

 

 

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 up to 18 years, some of which include options to extend the lease for up to 15 years and some of which include options to terminate the lease in 1.1 years. 

The right of use asset and lease liability were $6.1 million and $6.4 million as of March 31, 2022 and $6.4 million and $6.6 million at December 31, 2021.

Lease payments made for the three month period ended March 31, 2022, were $237 thousand and $202 thousand for the three month period ended March 31, 2021.  Interest expense and amortization expense on finance leases for the three month period ended March 31, 2022, was $38 thousand and $166 thousand.  Interest expense and amortization expense on finance leases for the three month period ended March 31, 2021, was $36 thousand and $121 thousand.  The average remaining lease term for all leases was 5.95 years as of March 31, 2022 and the weighted-average discount rate was 2.43%.

 

Maturities of lease liabilities are as follows as of March 31, 2022:

 

2022 (9 months)

 

$

596

 

2023

 

 

780

 

2024

 

 

610

 

2025

 

 

603

 

2026

 

 

586

 

Thereafter

 

 

4,245

 

Total Payments

 

 

7,420

 

Less: Imputed Interest

 

 

(1,035

)

Total

 

$

6,385

 

 

Derivative Financial Instruments:

 

Interest Rate Swaps

 

The Company maintains an interest rate protection program for commercial loan customers. Under this program, the Company provides a variable rate loan while creating a fixed rate loan for the customer by the customer entering into an interest rate swap with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $74.9 million and fair value of $2.2 million in other assets and $2.2 million in other liabilities at March 31, 2022. At December 31, 2021 the Company had interest rate swaps associated with commercial loans with and a notional value of $86.1 million and fair value of $4.0 million in other assets and $4.0 million in other liabilities. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820.

 

There were no net gains or losses for interest rate swaps for the period ended March 31, 2022 or December 31, 2021.

 

Mortgage Banking Derivatives

 

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market are considered derivatives. These mortgage banking derivatives are not designated in hedge relationships.  The Company had approximately $13.6 million of interest rate lock commitments at March 31, 2022 and $25.7 million of interest rate lock commitments at December 31, 2021.

 

The net gains and losses on derivative instruments not designated as hedging instruments are included in mortgage banking income.  For the quarter ended March 31, 2022, losses of $286,000 were included in mortgage banking income for the interest rate lock commitments.  For the fiscal year ended December 31, 2021, gains of $423,000 were included in mortgage banking income for the interest rate lock commitments.

 

25

 

 

Earnings Per Share:

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

 

 

Three Months Ended

March 31,

 

 

2022

 

 

2021

 

Basic EPS

 

 

 

 

 

 

 

Net income (In thousands)

$

15,844

 

 

$

14,556

 

Weighted average shares outstanding

 

33,820,485

 

 

 

28,215,772

 

Basic earnings per share

$

0.47

 

 

$

0.52

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

Net income (In thousands)

$

15,844

 

 

$

14,556

 

Weighted average shares outstanding for basic earnings per share

 

33,820,485

 

 

 

28,215,772

 

Dilutive effect of restricted stock awards

 

116,453

 

 

 

120,367

 

Weighted average shares for diluted earnings per share

 

33,936,938

 

 

 

28,336,139

 

Diluted earnings per share

$

0.47

 

 

$

0.51

 

 

There were 132,492 and 68,311 restricted stock awards that were considered anti-dilutive for the three month periods ended March 31, 2022 and 2021, respectively.

 

 

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 75,768 service time based share awards and 56,724 performance based share awards granted under the 2017 Plan during the three month period ended March 31, 2022, 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, 2024.  As of March 31, 2022, 137,383 shares are still available to be awarded from the 2017 Plan.  

 

In April of 2022, the Company, with the approval of shareholders, approved the 2022 Equity Incentive Plan (the “2022 Plan”).  The 2022 Plan permits the award of up to one million shares to the Company’s directors and employees.  The 2022 Plan will replace 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 $365 thousand and $330 thousand for the three month periods ended March 31, 2022 and 2021, respectively.  As of March 31, 2022, there was $3.7 million of total unrecognized compensation expense related to the nonvested shares granted under the Plan.  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, 2022.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

99,564

 

 

$

16.13

 

 

 

158,988

 

 

$

14.40

 

Granted

 

75,768

 

 

 

17.69

 

 

 

56,724

 

 

 

17.25

 

Vested

 

(15,771

)

 

 

17.29

 

 

 

(65,481

)

 

 

17.48

 

Forfeited

 

0

 

 

 

0.00

 

 

 

(12,862

)

 

 

14.74

 

Ending balance - non-vested shares

 

159,561

 

 

$

17.13

 

 

 

137,369

 

 

$

15.85

 

 

 

26

 

 

The following is the activity under the Plans during the three month period 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 81,252 shares that vested during the three month period ended March 31, 2022 had a weighted average fair value of $17.44 per share.

Other Comprehensive Income (Loss):

The following tables represent the details of other comprehensive income for the three month periods ended March 31, 2022 and 2021.

 

 

Three Months Ended March 31, 2022

 

(In Thousands of Dollars)

Pre-tax

 

 

Tax

 

 

After-Tax

 

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

$

(112,398

)

 

$

23,605

 

 

$

(88,793

)

Reclassification adjustment for gains included in net income (1)

 

0

 

 

 

0

 

 

 

0

 

Net unrealized losses on available-for-sale securities

$

(112,398

)

 

$

23,605

 

 

$

(88,793

)

Change in funded status of post-retirement health plan

 

(2

)

 

 

0

 

 

 

(2

)

Net other comprehensive loss

$

(112,400

)

 

$

23,605

 

 

$

(88,795

)

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

 

 

(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.  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, 2022, 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.  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%.

27

 

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, 2022 and December 31, 2021, 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.

 

Actual and required capital amounts and ratios, which do not include the capital conservation buffer, are presented below at March 31, 2022 and December 31, 2021:

 

 

Actual

 

 

Requirement For Capital

Adequacy Purposes:

 

 

To be Well Capitalized

Under Prompt Corrective

Action Provisions:

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

373,543

 

 

13.31

%

 

$

126,292

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

355,986

 

 

12.75

%

 

 

125,692

 

 

4.5

%

 

 

181,555

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

493,558

 

 

17.59

%

 

 

224,519

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

383,001

 

 

13.71

%

 

 

223,452

 

 

8.0

%

 

 

279,315

 

 

10.0

%

Tier 1 risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

391,543

 

 

13.95

%

 

 

168,389

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

355,986

 

 

12.75

%

 

 

167,589

 

 

6.0

%

 

 

223,452

 

 

8.0

%

Tier 1 leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

391,543

 

 

9.56

%

 

 

163,860

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

355,986

 

 

8.72

%

 

 

163,207

 

 

4.0

%

 

 

204,009

 

 

5.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common equity tier 1 capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

$

362,950

 

 

13.16

%

 

$

124,066

 

 

4.5

%

 

N/A

 

N/A

 

Bank

 

345,065

 

 

12.55

%

 

 

123,712

 

 

4.5

%

 

$

178,695

 

 

6.5

%

Total risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

485,336

 

 

17.60

%

 

 

220,562

 

 

8.0

%

 

N/A

 

N/A

 

Bank

 

374,451

 

 

13.62

%

 

 

219,933

 

 

8.0

%

 

 

274,916

 

 

10.0

%

Tier 1 risk based capital ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

380,950

 

 

13.82

%

 

 

165,422

 

 

6.0

%

 

N/A

 

N/A

 

Bank

 

345,065

 

 

12.55

%

 

 

164,950

 

 

6.0

%

 

 

219,933

 

 

8.0

%

Tier 1 leverage ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

380,950

 

 

10.12

%

 

 

150,629

 

 

4.0

%

 

N/A

 

N/A

 

Bank

 

345,065

 

 

9.19

%

 

 

150,217

 

 

4.0

%

 

 

187,772

 

 

5.0

%

 

Segment Information:

The reportable segments are determined by the products and services offered, primarily distinguished between banking and trust.  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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

5,796

 

 

$

100,654

 

 

$

(4,263

)

 

$

102,187

 

Total assets

 

$

19,548

 

 

$

4,182,798

 

 

$

3,509

 

 

$

4,205,855

 

28

 

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill and other intangibles

 

$

5,814

 

 

$

101,055

 

 

$

(4,263

)

 

$

102,606

 

Total assets

 

$

14,365

 

 

$

4,124,530

 

 

$

3,854

 

 

$

4,142,749

 

 

(In Thousands of Dollars)

 

Trust

Segment

 

 

Bank

Segment

 

 

Eliminations

and Others

 

 

Consolidated

Totals

 

For Three Months Ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

34

 

 

$

31,993

 

 

$

(785

)

 

$

31,242

 

Provision for credit losses and unfunded loans

 

 

0

 

 

 

(358

)

 

 

0

 

 

 

(358

)

Service fees, security gains and other noninterest income

 

 

9,198

 

 

 

8,741

 

 

 

(241

)

 

 

17,698

 

Noninterest expense

 

 

1,769

 

 

 

27,442

 

 

 

83

 

 

 

29,294

 

Amortization and depreciation expense

 

 

28

 

 

 

1,134

 

 

 

0

 

 

 

1,162

 

Income before taxes

 

 

7,435

 

 

 

12,516

 

 

 

(1,109

)

 

 

18,842

 

Income taxes

 

 

1,562

 

 

 

1,734

 

 

 

(298

)

 

 

2,998

 

Net income

 

$

5,873

 

 

$

10,782

 

 

$

(811

)

 

$

15,844

 

 

(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 and unfunded loans

 

 

0

 

 

 

425

 

 

 

0

 

 

 

425

 

Service fees, security gains and other noninterest income

 

 

2,603

 

 

 

7,514

 

 

 

15

 

 

 

10,132

 

Noninterest expense

 

 

1,556

 

 

 

15,181

 

 

 

(218

)

 

 

16,519

 

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

 

 

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

 

 

Short-term borrowings:

 

The Bank had no short-term advances from the FHLB at March 31, 2022 or December 31, 2021.

 

The Bank has access to lines of credit amounting to $35 million at two major domestic banks that are below prime rate. The lines and terms are periodically reviewed by the lending banks and are generally subject to withdrawal at their discretion. There were no borrowings under these lines at March 31, 2022 or at December 31, 2021.

 

Farmers has two unsecured revolving lines of credit for $6.5 million. These lines can be renewed annually. The lines have interest rates of prime with floors of 3.5% and 4.5%. There were no outstanding balances on either of these two lines at March 31, 2022 or at December 31, 2021, respectively.

 

Long-term borrowings:

There were no long-term advances from the FHLB at March 31, 2022 or at December 31, 2021.

The Bank’s long-term and short-term FHLB advances are secured by a blanket pledge of residential mortgage, commercial real estate, and multi-family loans totaling $1.3 billion and $1.2 billion at March 31, 2022 and December 31, 2021.  Based on this collateral, the Bank is eligible to borrow an additional $679.8 million at March 31, 2022.  

29

 

In November 2021, the Company completed the issuance of $75.0 million aggregate principal amount, fixed-to-floating rate subordinated notes due December 15, 2031, in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended.  The notes carry a fixed rate of 3.125% for five years at which time they will convert to a floating rate based on the three-month term secured overnight funding rate, plus a spread of 220 basis points.  The Company may, at its option, beginning December 15, 2026, redeem the notes, in whole or in part, from time to time, subject to certain conditions.  The net proceeds from the sale were approximately $73.8 million, after deducting the offering expenses.  The Company’s intent was to use the proceeds from the sale for general corporate purposes, which may include, without limitation, providing capital to support its growth organically or through acquisitions, in financing investments, capital expenditures, repurchasing its common shares and for investments in the Bank as regulatory capital.  The subordinated debentures are included in Total Capital under current regulatory guidelines and interpretations.

On November 1, 2021, the Company completed its acquisition of Cortland, which included the assumption of Floating Rate Junior Subordinated Debt Securities due in September 15, 2037 (the "junior subordinated debt securities") at an acquisition-date fair value of $4.3 million, held in a wholly-owned statutory trust whose common securities were wholly-owned by Cortland. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the capital securities held by third-party investors. The securities bear interest at a rate of 1.45% over the 3-month LIBOR rate.  The rate at March 31, 2022 was 2.28% and at December 31, 2021 was 1.65%.

 

On January 7, 2020, the Company completed its acquisition of Maple Leaf, which included the assumption of Floating Rate Junior Subordinated Debt Securities due December 15, 2036 (the "junior subordinated debt securities") held in a wholly-owned statutory trust whose common securities were wholly-owned by Maple Leaf. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the capital securities held by third-party investors. The securities bear interest at a rate of 1.70% over the 3-month LIBOR rate.  The rate at March 31, 2022 was 2.63% and at December 31, 2021 was 1.90%.

 

In 2015, the Company completed its acquisition of National Bancshares Corporation (“NBOH”), which included the assumption of Floating Rate Junior Subordinated Debt Securities due June 15, 2035 (the "junior subordinated debt securities") held in a wholly-owned statutory trust whose common securities were wholly-owned by NBOH. The sole assets of the statutory trust are the junior subordinated debt securities and related payments. The junior subordinated debt securities and the back-up obligations, in the aggregate, constitute a full and unconditional guarantee of the obligations of the statutory trust under the capital securities held by third-party investors. The securities bear interest at a rate of 1.80% over the 3-month LIBOR rate.  The rate at March 31, 2022 was 2.53% and at December 31, 2021 was 2.00%.

 

In all three instances, the Company may redeem the junior subordinated debentures at any quarter-end, in whole, or in part, at par.  This type of subordinated debenture qualifies as Tier 1 capital for regulatory purposes in determining and evaluating the Company’s capital adequacy.

 

A summary of all junior subordinated debentures issued by the Company to affiliates and subordinated debentures follows.  For the junior subordinated debentures, these amounts represent the par value of the obligations owed to these affiliates, including the Company’s equity interest in the trusts along with any unamortized fair value marks.  For the subordinated debentures, these amounts represent the par value less the remaining deferred offering expense associated with the issuance of the debentures.  

 

 

 

March 31, 2022

 

December 31, 2021

 

 

Amount

 

Amount

TSEO Statutory Trust I

 

$2,436

 

$2,424

Maple Leaf Financial Statutory Trust II

 

7,349

 

7,293

Cortland Statutory Trust I

 

4,285

 

4,271

Total junior subordinated debentures owed to unconsolidated subsidiary trusts

 

$14,070

 

$13,988

 

 

 

 

 

Subordinated debentures

 

$73,802

 

$73,770

 

 

30

 

 

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 2021 Form 10-K, 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;

 

•

new service and product offerings by competitors and price pressures;

 

•

and the regulatory landscape, capital markets, and the response to and management of the COVID-19 pandemic, including the provision 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, except as may be required by applicable law.

31

 

Overview

The Company’s results of operations for the quarter ended March 31, 2022 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 some limited closures of nonessential businesses, affecting customers of the Company.  The duration, extent and the effect of the government’s response to the economy is unknown.

The Company’s net income for the three months ended March 31, 2022, was $15.8 million, or $0.47 per diluted share, which compares to $14.6 million, or $0.51 per diluted share, for the three months ended March 31, 2021.  Net income improved as a result of the earnings stream from the Cortland acquisition, while the lower per share results reflect only partial cost savings from the merger integration, with full realization expected for the remainder of 2022.  Annualized return on average assets and annualized return on average equity were 1.52% and 13.89%, respectively, for the three month period ended March 31, 2022, compared to 1.87% and 16.81% for the same three month period in 2021.  

 

On March 23, 2022, Farmers entered into an agreement and plan of merger with Emclaire Financial Corp. (NASDAQ: EMCF), a Pennsylvania corporation (“Emclaire”), the parent company of The Farmers National Bank of Emlenton (“Emlenton”).  The transaction is subject to receipt of Emclaire shareholder approval and customary regulatory approvals and is expected to close during the second half of 2022.   The transaction will mark the Company’s expansion into Pennsylvania including the attractive Pittsburgh market.  Emclaire operates 19 branches in ten counties throughout western Pennsylvania.  As of March 31, 2022, Emclaire had total assets of $1.1 billion, gross loans of $794.9 million, deposits of $936.0 million and equity of $86.7 million. 

 

Total loans were $2.30 billion at March 31, 2022 compared to $2.33 billion at December 31, 2021.  Gross loans declined $26.1 million for the quarter but excluding the run off in PPP balances during the quarter the decline was $12.4 million.  At March 31, 2022, the Company has $23.2 million of PPP loans and $672 thousand in net deferred fees associated with these loans still to be recognized into income.  Average loans now comprise 58.8% of the Bank's first quarter average earning assets at March 31, 2022, compared to 69.2% for the same period in 2021.

 

Non-performing assets to total assets remain at a low level, currently at 0.33%.  Early stage delinquencies, which are loans 30 - 89 days delinquent, also continue to remain at low levels, at $7.3 million, or 0.32% of total loans, at March 31, 2022.  Net charge-offs for the current quarter were $1.4 million, compared to $84 thousand in the same quarter in 2021 and net charge-offs as a percentage of average net loans outstanding is only 0.25% for the quarter ended March 31, 2022, compared to 0.02% in the same quarter in 2021.  

 

Due to a decline in loan balances, a decrease in a specific reserve on one loan, and a continued decline in historical loss ratios, the Company recorded a negative provision for credit losses of $930 thousand for the quarter ended March 31, 2022, compared to the $425 thousand of loan loss provision recorded in the first quarter of 2021.  This was offset somewhat by an increase in the provision for unfunded loans which totaled $527 thousand.  As an overall percentage of loans, the allowance for credit losses decreased to 1.17% for the current quarter compared to 1.22% for the quarter ended March 31, 2021.  

The net interest margin for the three months ended March 31, 2022, was 3.27%, a 27 basis point decrease from the quarter ended March 31, 2021.  In comparing the first quarter of 2022 to the same period in 2021, asset yields decreased 41 basis points, while the cost of interest-bearing liabilities decreased 18 basis points.  Most of the decrease in the asset yields was the result of employing excess liquidity into lower yielding investment securities in the absence of loan growth and a decrease in PPP income compared to the same quarter a year ago.

32

 

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, 2022 and 2021:

 

 

 

At or for the Three Months

Ended March 31,

 

(In Thousands, except Per Share Data)

 

2022

 

 

2021

 

Total assets

 

$

4,205,855

 

 

$

3,324,524

 

Net income

 

$

15,844

 

 

$

14,556

 

Diluted earnings per share

 

$

0.47

 

 

$

0.51

 

Return on average assets (annualized)

 

 

1.52

%

 

 

1.87

%

Return on average equity (annualized)

 

 

13.89

%

 

 

16.81

%

Efficiency ratio (tax equivalent basis) (1)

 

 

61.36

%

 

 

48.24

%

Equity to asset ratio

 

 

9.37

%

 

 

10.45

%

Dividends to net income

 

 

34.18

%

 

 

21.35

%

Net loans to assets

 

 

54.16

%

 

 

60.53

%

Loans to deposits

 

 

62.40

%

 

 

71.92

%

 

(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.  

 

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.

33

 

Average Balance Sheets and Related Yields and Rates

(Dollar Amounts in Thousands)

 

 

Three Months Ended

 

 

Three Months Ended

 

 

March 31, 2022

 

 

March 31, 2021

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

AVERAGE

 

 

 

 

 

 

 

 

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

 

BALANCE

 

 

INTEREST

 

 

RATE (1)

 

EARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans (3) (4)

$

2,312,712

 

 

$

25,646

 

 

 

4.44

%

 

$

2,054,925

 

 

$

23,900

 

 

 

4.72

%

Taxable securities (2)

 

1,007,963

 

 

 

4,587

 

 

 

1.82

 

 

 

329,903

 

 

 

1,719

 

 

 

2.11

 

Tax-exempt securities (2) (4)

 

461,793

 

 

 

3,726

 

 

 

3.23

 

 

 

282,044

 

 

 

2,613

 

 

 

3.76

 

Other investments

 

31,122

 

 

 

130

 

 

 

1.67

 

 

 

14,840

 

 

 

121

 

 

 

3.31

 

Federal funds sold and other

 

117,916

 

 

 

48

 

 

 

0.16

 

 

 

287,323

 

 

 

71

 

 

 

0.11

 

TOTAL EARNING ASSETS

 

3,931,506

 

 

 

34,137

 

 

 

3.47

 

 

 

2,969,035

 

 

 

28,424

 

 

 

3.88

 

NONEARNING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

28,772

 

 

 

 

 

 

 

 

 

 

 

20,275

 

 

 

 

 

 

 

 

 

Premises and equipment

 

37,573

 

 

 

 

 

 

 

 

 

 

 

25,578

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(29,008

)

 

 

 

 

 

 

 

 

 

 

(25,336

)

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

(17,673

)

 

 

 

 

 

 

 

 

 

 

24,498

 

 

 

 

 

 

 

 

 

Other assets

 

227,448

 

 

 

 

 

 

 

 

 

 

 

141,645

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

$

4,178,618

 

 

 

 

 

 

 

 

 

 

$

3,155,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time deposits

$

378,675

 

 

$

643

 

 

 

0.68

%

 

$

440,452

 

 

$

1,255

 

 

 

1.16

%

Brokered time deposits

 

15,555

 

 

 

15

 

 

 

0.39

 

 

 

32,000

 

 

 

46

 

 

 

0.58

 

Savings deposits

 

843,371

 

 

 

167

 

 

 

0.08

 

 

 

495,832

 

 

 

193

 

 

 

0.16

 

Demand deposits

 

1,412,291

 

 

 

419

 

 

 

0.12

 

 

 

1,083,597

 

 

 

732

 

 

 

0.27

 

Short term borrowings

 

2,222

 

 

 

1

 

 

 

0.18

 

 

 

2,808

 

 

 

4

 

 

 

0.58

 

Long term borrowings

 

87,798

 

 

 

792

 

 

 

3.61

 

 

 

76,007

 

 

 

293

 

 

 

1.56

 

TOTAL INTEREST-BEARING LIABILITIES

 

2,739,912

 

 

 

2,037

 

 

 

0.30

 

 

 

2,130,696

 

 

 

2,523

 

 

 

0.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

956,499

 

 

 

 

 

 

 

 

 

 

 

650,588

 

 

 

 

 

 

 

 

 

Other liabilities

 

26,001

 

 

 

 

 

 

 

 

 

 

 

23,221

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

456,206

 

 

 

 

 

 

 

 

 

 

 

351,190

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

4,178,618

 

 

 

 

 

 

 

 

 

 

$

3,155,695

 

 

 

 

 

 

 

 

 

Net interest income and interest rate spread

 

 

 

 

$

32,100

 

 

 

3.17

%

 

 

 

 

 

$

25,901

 

 

 

3.40

%

Net interest margin

 

 

 

 

 

 

 

 

 

3.27

%

 

 

 

 

 

 

 

 

 

 

3.54

%

 

(1)

Rates are calculated on an annualized basis.

(2)

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

(3)

Interest on loans includes fee income of $1.5 million and $2.8 million for 2022 and 2021, respectively, and is reduced by amortization of $662 thousand and $687 thousand for 2022 and 2021, respectively.

(4)

For 2022, adjustments of $84 thousand and $774 thousand, respectively, are made to tax equate income on tax exempt loans and tax exempt securities.  For 2021, adjustments of $95 thousand and $539 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.

 

 

34

 

 

Net Interest Income.  Net interest income for the three month period ended March 31, 2022, was $31.2 million compared to $25.3 million for the same period in 2021.  The increase in net interest income was driven by an increase in interest earning assets, including the acquisition of Cortland Bancorp (“Cortland”), offset by a decline in the net interest margin.  The net interest margin decreased 27 basis points to 3.27% for the three months ended March 31, 2022, compared to 3.54% for the same three month period in the prior year.  In comparing the quarters ended March 31, 2022 and 2021, yields on earning assets decreased 41 basis points, while the cost of interest bearing liabilities decreased 18 basis points. Most of the decrease in the asset yields was the result of employing excess liquidity into lower yielding investment securities in the absence of loan growth, the acquisition of Cortland and a decrease in PPP income compared to the same quarter a year ago.

 

Noninterest Income. Noninterest income increased to $17.7 million for the first quarter of 2022 compared to $10.1 million for the quarter ended March 31, 2021.    The first quarter of 2022 increased over the same period in 2021 primarily due to $8.4 million in legal settlement income offset by a decline in net security gains of $499 thousand, or 102.3%, and a decline in net gains on the sale of loans of $1.8 million, or 61.1%.  The net gain on sale of loans has declined because of lower origination volumes due to increasing rates along with tighter gain on sale margins.  Other categories of noninterest income that increased year over year include service charges on deposit accounts of $337 thousand, or 41.7%, bank owned life insurance of $125 thousand, or 44.0%, trust fees of $283 thousand, or 12.7%, investment commissions of $190 thousand, or 37.7% and debit card and EFT fees of $245 thousand, or 20.9%.  Much of the increases in these categories was due to the acquisition of Cortland.

Noninterest Expense.  Total noninterest expense for the quarter ended March 31, 2022 was $30.5 million compared to $17.3 million in the first quarter of 2021.  The increase in expense year over year was due to the Company making a charitable contribution of $6.0 million to the Farmers Charitable Foundation, $2.1 million in legal expense associated with the legal settlement and $1.9 million in merger expense incurred in the first quarter of 2022.  The increase in the other categories of noninterest expense, year over year, was due to the Cortland acquisition which closed on November 1, 2021.  The system conversion for Cortland also didn’t take place until late February so the Company did not have a full quarter of cost savings in place for the first quarter of 2022.  The efficiency ratio for the quarter ended March 31, 2022 was 61.4% compared to 47.8% for the same quarter in 2021.  

Income Taxes. Income tax expense totaled $3.0 million for the quarter ended March 31, 2022, and $3.1 million for the quarter ended March 31, 2021.  The effective tax rate for the three month period ended March 31, 2022 and 2021 was 15.9% and 17.6%, respectively.

Financial Condition

Cash and Cash Equivalents.  Cash and cash equivalents increased $24.8 million during the first three months of 2022 from $112.8 million to $137.6 million.  

Securities.  Securities available-for-sale increased by $35.9 million since December 31, 2021 as the Company continued purchasing securities in the first quarter of 2022 in order to utilize excess cash on hand.  Offsetting these purchases, the gross unrealized gain of $11.7 million on available for sale securities at December 31, 2021 declined to a gross unrealized loss of $100.7 million at March 31, 2022 due to the rise in U.S. treasury rates during the first quarter.

Loans.  Gross loans (excluding loans held for sale) were $2.30 billion at March 31, 2022, compared to $2.33 billion at December 31, 2021.  Gross loans declined $26.1 million for the quarter but excluding the run off in PPP balances during the quarter the decline was $12.4 million.  At March 31, 2022, the Company has $23.2 million of PPP loans before deferred fees still to be forgiven, and $672 thousand in net deferred fees associated with these loans still to be recognized into income.  

Allowance for Loan 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.

35

 

Asset Quality History

(In Thousands of Dollars)

 

 

3/31/2022

 

 

12/31/2021

 

 

9/30/2021

 

 

6/30/2021

 

 

3/31/2021

 

Nonperforming loans

$

14,046

 

 

$

16,195

 

 

$

14,744

 

 

$

13,873

 

 

$

11,640

 

Nonperforming loans as a % of total loans

 

0.61

%

 

 

0.69

%

 

 

0.78

%

 

 

0.71

%

 

 

0.57

%

Loans delinquent 30-89 days

$

7,304

 

 

$

8,891

 

 

$

6,944

 

 

$

7,606

 

 

$

7,183

 

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

 

0.32

%

 

 

0.38

%

 

 

0.37

%

 

 

0.39

%

 

 

0.35

%

Allowance for credit losses

$

27,015

 

 

$

29,386

 

 

$

23,136

 

 

$

24,806

 

 

$

24,935

 

Allowance for credit losses as a % of loans

 

1.17

%

 

 

1.26

%

 

 

1.22

%

 

 

1.27

%

 

 

1.22

%

Allowance for credit losses as a % of nonperforming loans

 

192.33

%

 

 

181.45

%

 

 

156.92

%

 

 

178.81

%

 

 

214.22

%

Annualized net charge-offs to average net loans outstanding

 

0.25

%

 

 

0.06

%

 

 

0.06

%

 

 

0.04

%

 

 

0.02

%

Non-performing assets

$

14,046

 

 

$

16,195

 

 

$

14,744

 

 

$

13,903

 

 

$

11,670

 

Non-performing assets as a % of total assets

 

0.33

%

 

 

0.39

%

 

 

0.44

%

 

 

0.43

%

 

 

0.35

%

Net charge-offs for the quarter

$

1,441

 

 

$

313

 

 

$

286

 

 

$

179

 

 

$

84

 

 

Due to a decline in loan balances, a decrease in a specific reserve on one loan, and a continued decline in historical loss ratios, the Company recorded a negative provision for credit losses of $930 thousand for the quarter ended March 31, 2022, compared to the $425 thousand of loan loss provision recorded in the first quarter of 2021.  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 1.17% at March 31, 2022 and 1.22% at March 31, 2021.  Early stage delinquencies, which are loans 30 - 89 days delinquent, as a percentage of total loans decreased from 0.35% at March 31, 2021, to 0.32% at March 31, 2022, and non-performing loans as a percentage of total loans increased from 0.57% at March 31, 2021, to 0.61% at March 31, 2022.  The allowance for credit losses to non-performing loans decreased from 214.22% at March 31, 2021, to 192.33% at March 31, 2022.

Based on the evaluation of the adequacy of the allowance for credit losses, management believes that the allowance for credit losses at March 31, 2022, is adequate.  The provision for credit losses is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing loan portfolio.  Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.  Historical credit loss experience provides the basis for the estimation of expected credit losses.  Specific factors considered by management in determining the amounts charged to operating expenses include previous credit loss experience, the status of past due interest and principal payments, the quality of financial information supplied by loan customers and the general condition of the industries in the community to which loans have been made.

Deposits.  Total deposits increased $146.6 million from December 31, 2021, to March 31, 2022, for a balance of $3.69 billion.  The increase of $146.6 million since December 31, 2021 is due to seasonality in public fund balances and continued growth in business and consumer deposits.  In addition, the Company added $40.0 million in brokered deposits during the quarter.

Borrowings.  Total borrowing balances increased from $87.8 million at December 31, 2021 to $87.9 million at March 31, 2022.  

Capital Resources.  Total stockholders’ equity decreased $78.5 million, or 16.6%, during the three month period ended March 31, 2022.  The decrease in stockholders’ equity was primarily due to an $88.8 million decline in accumulated other comprehensive income and dividends paid to shareholders offset by net income for the quarter.  The rapid increase in U.S. treasury rates has had a negative effect on the value of the Company’s available for sale securities, and in turn, the dollar amount that flows through accumulated other comprehensive income.  Shareholders received $0.16 per share in cash dividends in the first quarter of 2022. Book value per share decreased from $13.94 per share at December 31, 2021 to $11.58 per share at March 31, 2022.  

36

 

The capital management function is a regular process that consists of providing capital for both the current financial position and the anticipated future growth of the Company.  At March 31, 2022 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 13.31%, total risk-based capital ratio stood at 17.59%, and the Tier 1 risk-based capital ratio and Tier 1 leverage ratio were at 13.95% and 9.56%, respectively, at March 31, 2022.  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, 2022.

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. 

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 2021 Form 10-K.  Critical accounting policies are those policies that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company has identified 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 2021 consolidated financial statements, Note 1 (Summary of Significant Accounting Policies), Note 2 (Business Combinations), 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.

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, 2022.

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.  

Liquidity

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

37

 

Along with its liquid assets, the Bank has additional sources of liquidity available which help to ensure that adequate funds are available as needed.  These other sources include, but are not limited to, access to funds in the wholesale arena, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at major domestic banks.  At March 31, 2022, 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 $6.5 million. There was no balance on these lines at March 31, 2022 and December 31, 2021.  Management feels that its liquidity position is adequate and continues to monitor the position on a monthly basis.  As of March 31, 2022, the Bank had no outstanding balances with the Federal Home Loan Bank but had additional borrowing capacity of approximately $679.8 million, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds with the posting of collateral.  The Bank views its membership in the FHLB as a solid source of liquidity.  

Off-Balance Sheet Arrangements

In the normal course of business, to meet the financial needs of our customers, we are a party to financial instruments with off-balance sheet risk.  These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the Consolidated Balance Sheets.  The Bank’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments.  Because some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The same credit policies are used in making commitments as are used for on-balance sheet instruments.  Collateral is required in instances where deemed necessary.  Undisbursed balances of loans closed include funds not disbursed but committed for construction projects.  Unused lines of credit include funds not disbursed, but committed for, home equity, commercial and consumer lines of credit.  Financial standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.  Those guarantees are primarily used to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Total unused commitments were $627.9 million at March 31, 2022, and $606.8 million at December 31, 2021.  Additionally, the Company committed up to $17.2 million in subscriptions in Small Business Investment Company investment funds.  At March 31, 2022, the Company has invested $15.3 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.

 

 

38

 

 

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.

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, 2022

Result

 

 

December 31, 2021

Result

 

 

ALCO

Guidelines

 

Net Interest Income Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

3.2

%

 

 

4.5

%

 

 

-10.0

%

+200

 

 

2.3

%

 

 

3.2

%

 

 

-7.5

%

+100

 

 

1.0

%

 

 

1.5

%

 

 

-5.0

%

-100

 

 

-3.0

%

 

 

-4.1

%

 

 

-5.0

%

Net Present Value Of Equity Change

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

 

2.7

%

 

 

6.2

%

 

 

-10.0

%

+200

 

 

3.5

%

 

 

7.6

%

 

 

-7.5

%

+100

 

 

2.9

%

 

 

6.1

%

 

 

-5.0

%

-100

 

 

-8.8

%

 

 

-12.4

%

 

 

-10.0

%

 

It should be noted that the change in the net present value of equity and net interest income had exceeded policy when the simulation model assumed a sudden decrease in rates of 100 basis points (1%).  This was 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 any policy exceptions and may consider changes to the asset/liability position in the future.  The results of the simulations indicate that interest rate change results fall within internal limits established by the Company at March 31, 2022.  A report on interest rate risk is presented to the Board of Directors and the Asset/Liability Committee on a quarterly basis.  It is management’s opinion that hedging instruments currently available are not a cost effective means of controlling interest rate risk for the Company. Accordingly, the Company does not currently use financial derivatives, such as interest rate options, swaps, caps, floors or other similar instruments, but does utilize swaps to accommodate large commercial borrowers that desire longer term fixed rates.

 

 

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, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

39

 

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

For a 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, 2021.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of equity securities by the issuer.

In 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.  At March 31, 2022, the Company had 546,182 shares remaining to be repurchased under this program.  There were no treasury stock shares repurchased under the program during the three month period ended March 31, 2022.

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

Not applicable.

40

 

Item 6.

Exhibits

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

 

2.1*

Agreement and Plan of Merger by and among Farmers National Banc Corp., Cortland Bancorp, and FMNB Merger Subsidiary IV, LLC, dated as of June 22, 2021 (incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 23, 2021).

 

 

2.2*

Amendment to Agreement and Plan of Merger by and among Farmers National Banc Corp., Cortland Bancorp, and FMNB Merger Subsidiary IV, LLC, dated as of October 12, 2021 (incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on June 18, 2021).

 

 

2.3*

Agreement and Plan of Merger by and among Farmers National Banc Corp., Emclaire Financial Corp., and FMNB Merger Subsidiary V, LLC, dated as of March 23, 2022 (incorporated by reference from Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on March 24, 2022).

 

 

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 May 1, 2013).

 

 

3.3*

Amendment to Articles of Incorporation of Farmers National Banc Corp., as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 20, 2018).

 

 

3.4*

Amended Code of Regulations of Farmers National Banc Corp. (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 17, 2020).

 

 

10.1**

Farmers National Banc Corp. 2022 Form of Notice of Grant of Long-term Incentive Plan Awards under 2017 Equity Incentive Plan (filed herewith).

 

 

10.2**

Farmers National Banc Corp. 2022 Form of Performance-based Equity Award under 2017 Equity Incentive Plan (filed herewith).

 

 

10.3**

Farmers National Banc Corp. 2022 Form of Service-based Restricted Stock Award under 2017 Equity Incentive Plan (filed herewith).

 

 

10.4**

Farmers National Banc Corp. 2022 Form of Performance-based Cash Award under 2017 Equity Incentive Plan (filed herewith).

 

 

10.5**

Farmers National Banc Corp. 2022 Equity Incentive Plan (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on April 22, 2022).

 

 

31.1**

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

 

 

31.2**

Rule 13a-14(a)/15d-14(a) Certification of A. Troy Adair, Executive Vice President, Chief Financial Officer and Secretary of the Company (principal financial officer) (filed herewith).

 

 

32.1**

Certification pursuant to 18 U.S.C. Section 1350 of Kevin J. Helmick, President and Chief Executive Officer of the Company (principal executive officer) (filed herewith).

 

 

32.2**

Certification pursuant to 18 U.S.C. Section 1350 of A. Troy Adair, Executive Vice President, Chief Financial Officer and Secretary of the Company (principal financial officer) (filed herewith).

 

 

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, 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, 2022, has been formatted in Inline XBRL.

 

41

 

 

*

Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

**

Constitutes a management contract or compensatory plan or arrangement.

42

 

 

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 5, 2022

 

/s/ Kevin J. Helmick

Kevin J. Helmick

President and Chief Executive Officer

Dated: May 5, 2022

 

/s/ A. Troy Adair

A. Troy Adair

Executive Vice President, Chief Financial Officer and Secretary

 

43

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 , 2022

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 , 2025 (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 $____ (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 $___ (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

(2022)

 

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, 2022 and ending on December 31, 2024 (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. For purposes of hereof, “Retirement” means termination after attaining either age 55 with at least 10 years of service with the Company or age 62 with at least 5 years of service with the Company.

 

 

(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.

-2-

 

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:

-3-

 

(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

-4-

 

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.  

-5-

 

 

(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]

 

-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 10.3

FARMERS NATIONAL BANC CORP.

RESTRICTED STOCK AWARD AGREEMENT

(2022)

 

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, 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. For purposes of hereof, “Retirement” means termination after attaining either age 55 with at least 10 years of service with the Company or age 62 with at least 5 years of service with the Company.

 

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:

-2-

 

(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

-3-

 

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.  

-4-

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By:

 

Signature

 

 

 

 

 

Its:

 

Print

 

 

 

 

 

 

 

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

(2022)

 

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, 2022 and ending on December 31, 2024 (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. For purposes of hereof, “Retirement” means termination after attaining either age 55 with at least 10 years of service with the Company or age 62 with at least 5 years of service with the Company.

 

 

(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.

 

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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 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:

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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 the 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 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.  

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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 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 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]


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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.

 

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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 5, 2022

 

/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, A. Troy Adair 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 5, 2022

/s/ A. Troy Adair

A. Troy Adair

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, 2022 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 5, 2022

 

 

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, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I A. Troy Adair, 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/ A. Troy Adair

A. Troy Adair

Chief Financial Officer

May 5, 2022