Business context and reporting period
Farmers National Banc Corp. filed this Form 10-K for the fiscal year ended December 31, 2023. It operates banking, trust, retirement consulting, insurance and investment businesses, primarily in northeastern Ohio and western Pennsylvania.
The year includes a full year of Emclaire Financial Corp. following its acquisition on January 1, 2023. The transaction expanded the company in western Pennsylvania and into the Pittsburgh market; consideration was approximately $92.6 million, including $59.2 million in stock and $33.4 million in cash.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Net income | $49.9 million | $60.6 million |
| Diluted earnings per share | $1.33 | $1.79 |
| Net interest income | $137.8 million | $124.2 million |
| Tax-equivalent net interest margin | 2.91% | 3.18% |
| Noninterest income | $41.9 million | $44.2 million |
| Noninterest expense | $111.8 million | $94.4 million |
| Operating cash flow | $62.3 million | $80.7 million |
At year-end, total assets were $5.08 billion, net loans were $3.16 billion, deposits were $4.18 billion and stockholders’ equity was $404.4 million. Cash and cash equivalents were $103.7 million. Short-term borrowings rose to $355.0 million from $95.0 million; long-term borrowings were $88.7 million. The Bank had $819.5 million of additional FHLB borrowing capacity against pledged collateral.
The allowance for credit losses was $34.4 million, or 1.08% of loans, versus $27.0 million, or 1.12%, in 2022. Nonperforming loans were 0.47% of total loans, down from 0.62%. Net charge-offs were $2.3 million. The Bank was categorized as well capitalized; year-end CET1 and total risk-based capital ratios were 11.15% and 12.13%, respectively.
Material changes versus prior year
- Net income fell 17.6%, despite higher net interest income. Interest expense increased to $75.5 million from $17.9 million as deposit and borrowing costs rose; the average cost of interest-bearing liabilities increased 148 basis points.
- Average loan balances grew substantially, largely from Emclaire, and loan yield rose to 5.46% from 4.58%. However, deposit funding costs rose faster than asset yields, reducing margin.
- Loans increased $793.4 million to $3.20 billion, primarily reflecting $740.7 million of acquired loans. Deposits increased $615.6 million to $4.18 billion, while short-term borrowings increased to support funding needs and replace brokered deposits.
- Credit-loss provision expense was $8.7 million, compared with $0.3 million in 2022; the increase was attributed principally to the acquisition and its day-one purchase accounting allowance.
- Noninterest expense increased $17.4 million, mainly due to Emclaire-related staff, facilities, processing and amortization costs. Merger costs were $5.5 million.
- 2022 included an $8.4 million legal-settlement gain and a related $6.0 million charitable contribution; neither recurred in 2023. 2023 included $785,000 of lawsuit-settlement expense.
- Available-for-sale securities had $222.6 million of gross unrealized losses at year-end, down from $266.8 million. Accumulated other comprehensive loss improved by $37.9 million during 2023 but remained $172.6 million.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management describes loan growth and efforts to reduce the investment portfolio as strategies to address interest-rate exposure and the gap between book and market rates. It also used short-term wholesale funding to respond to deposit pressure and avoid locking in higher long-term core deposit costs.
Interest-rate sensitivity analysis showed that a sudden, sustained 400-basis-point increase would reduce modeled net interest income by 6.2% and economic value of equity by 36.4%; the EVE result exceeded internal policy limits. Management noted that the yield curve was inverted and described uncertainty around rate movements, deposit behavior and asset values.
Key risks include deposit competition and outflows, higher funding costs, concentrations in commercial and residential real estate, consumer auto credit, changing local economic conditions, acquisition integration and goodwill impairment, and cyber and third-party service-provider threats. Uninsured deposits were $1.37 billion at year-end; core deposits represented approximately 93.3% of total deposits. The filing reports no detected significant cybersecurity compromise or material cyber-related financial loss to date.
The 2023 audit opinion was unqualified, and management and the auditor concluded internal control over financial reporting was effective. The auditor identified the allowance for credit losses and fair-value estimates for acquired loans and the core deposit intangible as critical audit matters. Management reported pending and threatened legal matters but did not expect them, based on information available, to have a material adverse effect overall; an unfavorable resolution could affect a particular future period.
Most important facts for investors to verify
- Whether deposit retention and funding costs stabilize, especially as $656.2 million of certificates of deposit mature in 2024 and uninsured deposits remain significant.
- Whether margin pressure eases and the company can replace higher-cost borrowings with stable deposits without sacrificing liquidity.
- Whether acquired-loan credit performance, commercial real estate conditions and the allowance remain adequate as the enlarged portfolio seasons.
- How the $222.6 million of securities unrealized losses, the interest-rate hedge and the modeled EVE sensitivity evolve with market rates.
- Whether Emclaire integration produces anticipated efficiencies and growth, and whether goodwill of $167.4 million and other acquired intangibles remain recoverable.