Business context and reporting period
Farmers National Banc Corp. (NASDAQ: FMNB) is an Ohio-based financial holding company operating banking and trust businesses, with insurance and investment activities. This Form 10-K covers the fiscal year ended December 31, 2022; financial amounts below are in U.S. dollars.
The year included a full year of Cortland Bancorp results, following its November 2021 acquisition. Emclaire Financial Corp. was acquired on January 1, 2023, after the reporting period, and therefore its results are not included in 2022.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $60.6 million | $51.8 million |
| Diluted earnings per share | $1.79 | $1.77 |
| Net interest income | $124.2 million | $108.0 million |
| Tax-equivalent net interest margin | 3.18% | 3.45% |
| Total noninterest income | $44.2 million | $38.2 million |
| Total noninterest expense | $94.4 million | $79.2 million |
| Provision for credit losses and unfunded commitments | $1.1 million | $4.9 million |
| Net cash from operating activities | $83.7 million | $54.9 million |
Interest income rose to $142.1 million from $116.5 million, while interest expense increased to $17.9 million from $8.5 million. Management attributed the margin decline to lower PPP income and fees, higher deposit and borrowing costs as rates rose, and a greater share of lower-yielding securities. Noninterest expense growth principally reflected the Cortland combination and the larger operating base.
At year-end, total assets were $4.08 billion, net loans were $2.38 billion, and deposits were $3.56 billion. Loans grew 3.2% year over year. Cash and cash equivalents were $75.6 million. The company reported $95.0 million of short-term borrowings and $88.2 million of long-term borrowings. Management reported $1.5 billion of on-hand liquidity, including cash, unencumbered securities and additional FHLB borrowing capacity.
Stockholders’ equity was $292.3 million, down from $472.4 million. The principal driver was a $219.8 million after-tax other comprehensive loss, largely from unrealized losses on available-for-sale securities as interest rates increased. The securities portfolio had $266.8 million of gross unrealized losses against $1.535 billion of amortized cost; management attributed the losses to interest rates and market factors, not credit deterioration, and recorded no allowance for credit losses on those securities.
The Bank was categorized as well capitalized. At December 31, 2022, its common equity tier 1 ratio was 12.71%, total risk-based capital ratio 13.62%, tier 1 risk-based capital ratio 12.71%, and tier 1 leverage ratio 8.76%.
Material changes versus the prior comparable period
- Net income increased 16.9%, while diluted EPS rose modestly from $1.77 to $1.79; the 2022 results included a full year of Cortland, versus two months in 2021.
- Net interest income increased $16.2 million, but the tax-equivalent net interest margin fell 27 basis points to 3.18% as funding costs rose and PPP-related income declined.
- Net charge-offs increased to $2.7 million from $0.9 million. The allowance for credit losses fell to $27.0 million from $29.4 million; nonperforming loans declined to 0.62% of loans from 0.69%.
- Deposits increased only $14.5 million overall. The company reported $138.1 million of brokered time deposits and $95.0 million of short-term FHLB advances at year-end, compared with none of each at year-end 2021.
- Cash and cash equivalents fell by $37.2 million during the year. Operating cash flow was $83.7 million, investing cash flow was negative $208.5 million, and financing cash flow was positive $87.5 million.
Outlook, commentary, risks and unusual items
The filing does not provide quantified earnings or revenue guidance. Management described loan growth and a shrinking securities portfolio as measures to address interest-rate exposure and noted use of wholesale funding in response to deposit runoff. It also cautioned that future results depend on economic conditions, inflation, market rates, loan demand, deposit competition and integration of acquisitions.
- Interest-rate and securities risk: The company’s year-end simulation showed a 5.4% decline in net interest income and a 20.9% decline in economic value of equity under a sudden, sustained 300-basis-point rate increase. The modeled EVE results under rising-rate scenarios exceeded internal policy limits.
- Credit and concentration risk: Real-estate-secured lending represented about 75.8% of the loan portfolio under the risk-factor discussion; loans are concentrated in the company’s Ohio and nearby markets. Management cited potential exposure to borrower stress, real-estate values and higher future credit losses.
- Deposit and liquidity risk: Deposits above the FDIC insurance limit totaled $1.31 billion. Deposit competition, withdrawals and access to wholesale funding could affect funding costs and liquidity.
- Acquisition and integration: Emclaire’s acquisition added 19 branches and, as of December 31, 2022, had $1.02 billion of assets, $797.3 million of gross loans and $874.6 million of deposits. Integration costs, retention and realization of expected benefits remain relevant risks.
- Unusual 2022 items: The company recorded $8.4 million of legal settlement income and made a $6.0 million special charitable donation, which management said was made possible by the settlement. It also recorded a $454,000 loss on securities sales following a portfolio restructuring. The decline in gains on loan sales—from $8.3 million to $2.1 million—also weighed on noninterest income.
- Contingencies and controls: Management said pending or threatened legal matters were not expected to have a material adverse effect based on information then available, while acknowledging an unfavorable resolution could affect a particular future period. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How deposit trends, brokered funding and borrowing costs evolved after year-end, and whether the reported liquidity remains available under stress.
- Whether securities valuation losses, rising-rate sensitivity and the out-of-policy EVE scenarios have changed; review subsequent filings for portfolio actions and capital effects.
- Credit-quality trends, particularly commercial and commercial real-estate exposures, commercial charge-offs, delinquency migration and the adequacy of the CECL allowance.
- Emclaire integration progress, final purchase accounting, realized synergies and any effects on capital, earnings or operating expenses.
- The sustainability of earnings excluding the legal settlement and associated charitable donation, and the outlook for loan-sale gains and net interest margin.
- Confirm that subsequent financial statements reconcile the reported year-end balances and reflect any post-year-end acquisition or other material developments.