Competition and Market Environment - The Bank faces significant competition in Ohio, with competitors including savings banks, commercial banks, credit unions, and non-depository competitors like mutual funds and insurance companies[16] Subsidiaries and Business Operations - Farmers Trust Company, acquired in 2009, operates five offices in Ohio and provides personal and corporate trust services[17] - Farmers National Captive, Inc., formed in 2016, is a wholly-owned insurance subsidiary that provides property and casualty insurance coverage to the company and its subsidiaries[18] - Farmers National Insurance, LLC, formed in 2009, offers various insurance products and merged with Bowers Insurance Agency, Inc. in 2016[20] - Farmers of Canfield Investment Company, formed in 2014, primarily invests in municipal securities[21] Employee and COVID-19 Response - As of December 31, 2022, Farmers and its subsidiaries had 546 full-time equivalent employees[23] - Farmers implemented COVID-19 safety protocols, including distributing PPE, promoting remote work, and providing additional PTO and bonuses for front-line employees[26] Regulatory Environment - Farmers Bank is subject to regulation by the OCC and FDIC, with restrictions on activities, capital requirements, and dividend limitations[32][37] - The company is regulated by the Federal Reserve Board as a financial holding company, with activities including securities underwriting and insurance[29][39] - Farmers Bank is a member of the Federal Home Loan Bank of Cincinnati, which provides credit and requires community investment standards[36] - Farmers Bank is subject to restrictions on transferring funds to affiliates, with limits of 10% of capital stock and surplus for any single affiliate and 20% in aggregate[48] - Basel III requires Farmers Bank to maintain a minimum Common Equity Tier 1 (CET1) ratio of 7.0%, Tier 1 capital ratio of 8.5%, and total capital ratio of 10.5%[57] - Basel III allows deductions from CET1 if mortgage servicing rights, deferred tax assets, or investments in non-consolidated financial entities exceed 10% of CET1 individually or 15% in aggregate[58] - The Dodd-Frank Act may impose more stringent capital requirements on systemically important financial institutions, potentially impacting the company's net income and return on equity[59] - The CECL model adoption impact on regulatory capital was delayed for two years due to COVID-19, followed by a three-year transition period[60] - The Regulatory Relief Act exempts bank holding companies with assets under $100 billion, including Farmers, from enhanced prudential standards and certain reporting requirements[61] - The Volcker Rule exempts community banks with $10 billion or less in total consolidated assets and trading assets/liabilities of 5% or less of total assets[65] - The FDIC's designated reserve ratio (DRR) fell to 1.30% as of June 30, 2020, prompting a restoration plan to reach 1.35% by September 30, 2028[72] - The FDIC assesses deposit insurance premiums based on risk characteristics and may impose special assessments in emergencies[70] - The Federal Reserve Board's monetary policies significantly affect the company's loan growth, deposit levels, and interest rates[74] - Farmers Bank received a "satisfactory" rating in its most recent Community Reinvestment Act (CRA) examination, which is required for new activities or acquisitions under the Bank Holding Company Act (BHCA)[76] - The Paycheck Protection Program (PPP) application deadline expired on May 31, 2021, with no collateral or personal guarantees required for loans, and no fees charged to recipients[87] - Federal banking regulators require financial institutions to notify their respective federal regulator of a computer-security incident within 36 hours of determining its occurrence, effective May 2022[90] - The Cyber Incident Reporting for Critical Infrastructure Act, enacted in March 2022, requires covered entities to report cybersecurity incidents to CISA within 72 hours and ransom payments within 24 hours[91] - The Dodd-Frank Act allows shareholders to cast non-binding votes on executive compensation practices and imposes new disclosure requirements[84] - The CARES Act, enacted in March 2020, created the PPP to fund operational costs for eligible businesses during COVID-19, with Farmers Bank participating as a lender[86] - Federal banking regulators issued guidance in 2015 requiring financial institutions to maintain business continuity planning processes to recover from cybersecurity attacks[88] - The Sarbanes-Oxley Act requires the company's CEO and CFO to certify the accuracy of Quarterly and Annual Reports and disclose internal control evaluations[81] - State regulators are increasingly implementing privacy and cybersecurity standards, with Farmers Bank monitoring these developments[92] Interest Rate and Financial Risk Management - Net interest income change for a +300 basis points interest rate shift is -5.4% in 2022, exceeding the ALCO guidelines of 4.5% to -10.0%[300] - Net present value of equity change for a +300 basis points interest rate shift is -20.9% in 2022, exceeding the ALCO guidelines of 6.2% to -10.0%[300] - The Federal Open Market Committee raised the discount rate by 4.5% throughout 2022, the fastest pace on record, leading to an inverted yield curve[300] - The two-year treasury yield exceeds the ten-year treasury yield by 55 basis points at the end of 2022, compared to the ten-year exceeding the two-year by over 139 basis points at the end of 2021[300] - The investment portfolio has a 17% valuation reserve due to the highly elevated yield curve[300] - The company prioritizes loan growth and shrinks the investment portfolio to mitigate the gap between book rates and market rates[300] - The company utilizes wholesale funding in response to deposit shrinkage to avoid cost increases on core deposits[300] - The largest amount of interest-sensitive assets and liabilities mature within twelve months, which the company monitors closely[302] - Early withdrawal of deposits, prepayments of loans, and loan delinquencies can impact actual results compared to simulation analysis[302] - The company does not hold market risk-sensitive instruments for trading purposes or derivative financial instruments and has no plans to purchase them in the near future[301] Cybersecurity and Risk Management - Farmers Bank employs multiple layers of security controls and preventative tools to monitor and block suspicious activity, though cybersecurity risks remain high[93]
Farmers National Banc(FMNB) - 2022 Q4 - Annual Report