Farmers National Banc(FMNB) - 2019 Q4 - Annual Report

Part I Business Farmers National Banc Corp. operates as a financial holding company through its Bank and Trust segments, growing via acquisitions and subject to extensive federal and state financial regulations - The Company operates as a financial holding company through its primary subsidiaries, The Farmers National Bank of Canfield and Farmers Trust Company, reporting in Bank and Trust segments[9][11] - Strategic acquisitions, including Monitor Bancorp in 2017 and Maple Leaf Financial in January 2020, have driven company growth[12][13] - Extensive regulation by agencies like the Federal Reserve Board, OCC, and FDIC governs the company and its subsidiaries[23][26][27] - As a financial holding company, Farmers is subject to Basel III capital requirements, fully effective in 2019, and acts as a source of strength for subsidiaries[35][41][54] Risk Factors The company faces significant risks from real estate loan concentration, interest rate fluctuations, acquisition integration, operational vulnerabilities, and regulatory changes - The loan portfolio has a significant 61.6% concentration in real estate loans, making it vulnerable to local market downturns[97] - Fluctuations in interest rates directly affect net interest income, a primary earnings driver[92] - Integrating acquired businesses like Maple Leaf and Monitor poses risks, potentially diverting management and failing to yield expected synergies[106][107][108] - Operational risks include potential data breaches of sensitive customer information, leading to reputational damage and financial loss[116][118] - The allowance for loan losses is a critical estimate, and incorrect assumptions could lead to insufficient coverage for inherent portfolio losses[102] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments from the Commission staff[137] Properties The company operates from its main office in Canfield, Ohio, with numerous owned and leased bank and trust offices across Ohio and Pennsylvania - The Bank's main office is located at 20 and 30 S. Broad St., Canfield, Ohio[138][142] - The Bank owns most branch locations but leases several offices, including those in Colonial Plaza, Canton, Alliance, and East Liverpool[143] - Farmers Trust operates from five locations, with two owned by the Bank and three leased from third parties[144] Legal Proceedings The company is subject to various legal actions, with one pending legal settlement requiring accrual as of December 31, 2019 - The company has accrued for a pending legal settlement as of December 31, 2019, with other matters not expected to be material[145] Mine Safety Disclosures This item is not applicable to the company - Not applicable[146] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities FMNB common shares trade on Nasdaq, with quarterly stock prices and dividends reported, and a 2019 share repurchase program authorized for up to 1.5 million shares Quarterly Stock Price and Dividend Data (per share) | Quarter Ended | 2019 High | 2019 Low | 2019 Dividend | 2018 High | 2018 Low | 2018 Dividend | |:---|:---|:---|:---|:---|:---|:---| | March 31 | $14.98 | $11.57 | $0.09 | $15.90 | $12.80 | $0.07 | | June 30 | $15.00 | $13.44 | $0.09 | $16.75 | $13.56 | $0.07 | | Sept 30 | $15.13 | $13.25 | $0.10 | $16.90 | $14.95 | $0.08 | | Dec 31 | $16.50 | $14.02 | $0.10 | $15.48 | $11.56 | $0.08 | - On July 30, 2019, the Board authorized a new share repurchase program for up to 1.5 million shares of common stock[151] - The company repurchased 201,169 shares in 2019 under its program, with no repurchases in 2018 or 2017[151] Selected Financial Data This section summarizes five years of key financial data, highlighting 2019 net income of $35.8 million, total assets of $2.45 billion, and strong ROA and ROE Selected Financial Highlights (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | |:---|:---:|:---:|:---:| | Net Income | $35,760 | $32,569 | $22,711 | | Diluted EPS | $1.28 | $1.16 | $0.82 | | Total Assets | $2,449,158 | $2,328,864 | $2,159,069 | | Net Loans | $1,797,052 | $1,722,248 | $1,565,066 | | Total Deposits | $2,008,964 | $1,799,720 | $1,604,719 | | Total Stockholders' Equity | $299,309 | $262,320 | $242,074 | | Return on Average Assets (ROA) | 1.50% | 1.46% | 1.09% | | Return on Average Equity (ROE) | 12.56% | 13.13% | 9.92% | Reconciliation of Net Income to Adjusted Net Income (Non-GAAP, in thousands) | Description | 2019 | 2018 | 2017 | |:---|:---:|:---:|:---:| | Net income (GAAP) | $35,760 | $32,569 | $22,711 | | Acquisition related costs - tax equated | $167 | $(158) | $283 | | Deferred tax asset adjustment | $0 | $0 | $1,793 | | Net income - adjusted (Non-GAAP) | $35,927 | $32,411 | $24,787 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights 2019 net income growth to $35.8 million, driven by increased net interest and noninterest income, improved credit quality, and strong capital levels Comparison of Operating Results (2019 vs. 2018) | Metric | 2019 ($M) | 2018 ($M) | Change | |:---|:---:|:---:|:---:| | Net Income | $35.8 | $32.6 | +9.8% | | Diluted EPS | $1.28 | $1.16 | +10.3% | | Return on Average Assets (ROA) | 1.50% | 1.46% | +4 bps | | Return on Average Equity (ROE) | 12.56% | 13.13% | -57 bps | | Net Interest Margin (Tax-Equiv.) | 3.82% | 3.87% | -5 bps | - Noninterest income increased by $3.1 million (12.2%) in 2019, driven by trust fees, investment commissions, and a 63.0% rise in net gains on loan sales[181] - Noninterest expense increased by $2.7 million (4.4%), primarily due to higher salaries and a $0.51 million one-time litigation expense[182] - Credit quality improved in 2019, with nonperforming loans to total loans decreasing to 0.35% and the allowance for loan losses to non-performing loans ratio improving to 228.32%[215][221] - The company adopted the new CECL accounting standard on January 1, 2020, resulting in a one-time $2.5 million (17%) increase to the allowance for loan losses[216] Quantitative and Qualitative Disclosure about Market Risk The company's primary market risk is interest rate exposure, with simulations showing a 19.7% NPV of Equity decline from a 100 bps rate decrease, exceeding policy limits Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Rate Change (bps) | % Change in Net Interest Income | % Change in NPV of Equity | Policy Guideline (NPV) | |:---|:---:|:---:|:---:| | +300 | +5.8% | +21.6% | -20% | | +200 | +4.0% | +19.0% | -15% | | +100 | +2.1% | +12.6% | -10% | | -100 | -4.4% | -19.7% | -10% | - A 100 basis point rate decrease simulation shows a 19.7% decline in Net Present Value of Equity, exceeding the 10% internal policy guideline[259] Financial Statements and Supplementary Financial Data This section presents the audited consolidated financial statements for 2019, including the Balance Sheet, Income Statement, and accompanying notes on accounting policies and capital adequacy Consolidated Financial Statements The consolidated financial statements show total assets of $2.45 billion and net income of $35.8 million for 2019, reflecting strong financial performance Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | |:---|:---:|:---:| | Total Assets | $2,449,158 | $2,328,864 | | Net Loans | $1,797,052 | $1,722,248 | | Total Deposits | $2,008,964 | $1,799,720 | | Total Liabilities | $2,149,849 | $2,066,544 | | Total Stockholders' Equity | $299,309 | $262,320 | Consolidated Income Statement Highlights (in thousands) | Account | 2019 | 2018 | 2017 | |:---|:---:|:---:|:---:| | Net Interest Income | $82,378 | $78,501 | $73,646 | | Provision for loan losses | $2,450 | $3,000 | $3,350 | | Noninterest Income | $28,602 | $25,499 | $24,051 | | Noninterest Expense | $65,455 | $62,717 | $61,186 | | Net Income | $35,760 | $32,569 | $22,711 | Notes to Consolidated Financial Statements Notes detail accounting policy changes like CECL adoption, loan portfolio credit quality, 'well capitalized' regulatory status, and segment performance, with the Bank segment as the primary profit driver - The company adopted a new lease accounting standard on January 1, 2019, capitalizing a $3.6 million right-of-use asset and corresponding lease liability[361] - The company will adopt the new CECL credit loss standard on January 1, 2020, expecting a 15% to 20% increase in the allowance for loan losses[359] Regulatory Capital Ratios (as of Dec 31, 2019) | Ratio | Company Actual | Bank Actual | Required for Well Capitalized (Bank) | |:---|:---:|:---:|:---:| | Common equity tier 1 | 12.94% | 11.19% | 6.5% | | Tier 1 risk-based capital | 13.06% | 11.19% | 8.0% | | Total risk-based capital | 13.82% | 11.95% | 10.0% | | Tier 1 leverage | 10.69% | 9.06% | 5.0% | - The Bank segment generated $34.4 million in net income in 2019, significantly outperforming the Trust segment's $2.3 million[550] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company engaged CliftonLarsonAllen, LLP as its new independent auditor on January 30, 2019, replacing Crowe LLP, with no reported disagreements - The Company changed its independent registered public accounting firm from Crowe LLP to CliftonLarsonAllen, LLP (CLA) for the fiscal year ending December 31, 2019[563][565] - There were no disagreements with former auditor Crowe LLP regarding accounting principles, financial statement disclosure, or auditing scope[566] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - Management, including the CEO and CFO, concluded the Company's disclosure controls and procedures were effective as of the period end[567] - No material changes occurred in internal controls over financial reporting during 2019[571] Other Information No other information is reported for this item - None[572] Part III Directors, Executive Officers and Corporate Governance This section details the company's directors and executive officers, with director information incorporated by reference, and highlights the adopted Code of Business Conduct and Ethics - Information on directors, the audit committee, and nomination procedures is incorporated by reference from the 2020 definitive proxy statement[575][591][592] - The report lists ten executive officers, including President and CEO Kevin J. Helmick and Senior Executive Vice President Carl D. Culp, with their business experience[576][577][579] - The Company has adopted a Code of Business Conduct and Ethics applicable to all employees and officers, available on its website[589] Executive Compensation All executive compensation information is incorporated by reference from the company's 2020 definitive proxy statement - Required information is incorporated by reference from the 2020 Proxy Statement's "Compensation Discussion and Analysis" and "Executive Compensation and Other Information" sections[593] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters All information on security ownership and related stockholder matters is incorporated by reference from the company's 2020 definitive proxy statement - Required information is incorporated by reference from the 2020 Proxy Statement's "Equity Compensation Plan Information" and "Beneficial Ownership of Management and Certain Beneficial Owners" sections[595][596] Certain Relationships and Related Transactions, and Director Independence All information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 definitive proxy statement - Required information is incorporated by reference from the 2020 Proxy Statement's "Certain Relationships and Related Transactions" and "The Board of Directors — Independence" sections[597][598] Principal Accountant Fees and Services All information on principal accountant fees and services is incorporated by reference from the company's 2020 definitive proxy statement - Required information is incorporated by reference from the 2020 Proxy Statement's "Independent Registered Public Accounting Firm Fees" and "Pre-Approval of Fees" sections[599] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements, compensation plans, and required certifications - The consolidated financial statements are included in Item 8 of the report[602] - An index to all filed exhibits is provided, including key agreements, compensation plans, and required certifications[603][608] Form 10-K Summary No summary is provided for this item - None[605]