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Farmers National Banc(FMNB) - 2023 Q4 - Annual Report

PART I Item 1. Business Farmers National Banc Corp is a financial holding company operating through banking, trust, insurance, and investment subsidiaries - Farmers National Banc Corp. is a financial holding company, organized in 1983, and declared itself a financial holding company in 2016, allowing it to engage in broader financial activities including securities underwriting, insurance, and merchant banking11 - The Company operates principally through its wholly-owned subsidiaries: The Farmers National Bank of Canfield (banking), Farmers Trust Company (trust, retirement consulting), Farmers National Insurance, LLC (insurance), and Farmers of Canfield Investment Co. (municipal securities investment)1118192021 - On January 1, 2023, Farmers National Banc Corp. completed its merger with Emclaire Financial Corp., with The Farmers National Bank of Emlenton merging into The Farmers National Bank of Canfield14 - As of December 31, 2023, Farmers and its subsidiaries had 666 full-time equivalent employees, offering a comprehensive benefits package and focusing on attracting and retaining talent24 - The Company and its subsidiaries are subject to extensive regulation by federal and state agencies, including the Federal Reserve Board, OCC, FDIC, and NASDAQ, with regulations primarily aimed at protecting consumers, depositors, and the banking system2729303134 - Key regulatory areas include capital adequacy (Basel III), prompt corrective action, deposit insurance, fiscal and monetary policies, Community Reinvestment Act, customer privacy, anti-money laundering, corporate governance, executive compensation, and cybersecurity3945516668727475767779828589 Executive Officers as of March 1, 2024 | Name | Age | Title | | :--- | :--- | :--- | | Troy Adair | 57 | Executive Vice President, Secretary and Treasurer of Farmers and Senior Executive Vice President and Chief Financial Officer of Farmers Bank | | Kevin J. Helmick | 52 | President and Chief Executive Officer of Farmers and Farmers Bank | | Brian E. Jackson | 54 | Executive Vice President and Chief Information Officer of Farmers Bank | | Michael E. Matuszak | 56 | Senior Executive Vice President and Chief Operating Officer of Farmers Bank | | Mark A. Nicastro | 53 | Executive Vice President and Chief Human Resources Officer of Farmers Bank | | Michael Oberhaus | 47 | Executive Vice President and Chief Risk Officer of Farmers Bank | | Joseph W. Sabat | 63 | Senior Vice President and Chief Accounting Officer of Farmers Bank | | Timothy F. Shaffer | 62 | Senior Executive Vice President and Chief Credit Officer of Farmers Bank | | Amber Wallace Soukenik | 58 | Senior Executive Vice President and Chief Retail/Marketing Officer of Farmers Bank | | Mark J. Wenick | 64 | Senior Executive Vice President and Chief Wealth Management Officer of Farmers Bank | Item 1A. Risk Factors The Company faces risks from economic conditions, credit, liquidity, operations, and regulatory changes - Economic, political, and market conditions (e.g., inflation, recession, interest rates, geopolitical instability) can adversely affect asset quality, deposit levels, loan demand, and earnings, particularly due to significant real estate loan exposure in Northeast Ohio109110111116118 - The Company's financial condition and stock price may be negatively impacted by unrelated bank failures and negative depositor confidence, as seen in early 2023, potentially affecting funding sources and increasing regulatory requirements120121122 - Credit risk is significant, especially from commercial and residential real estate loans (majority of portfolio) and indirect lending, which involves depreciating assets and limited borrower contact126127128130131132133134135 - Liquidity risk exists if the Company cannot generate sufficient cash flows from deposits, loan/security repayments, or borrowings to meet obligations; core deposits comprised 93.3% of total deposits at December 31, 2023138 - Operational risks include reputational damage, fraud, unauthorized transactions, system errors, and cybersecurity attacks148149150152153 - Regulatory changes, such as increased FDIC insurance premiums, new capital requirements (Basel III), and evolving ESG expectations, could increase costs, limit activities, or expose the Company to new risks158160167168 Item 1B. Unresolved Staff Comments. There are no unresolved staff comments from the Securities and Exchange Commission staff - No matters of unresolved staff comments from the Commission staff174 Item 1C. Cybersecurity The Company is subject to evolving cybersecurity regulations and employs various tools to monitor and mitigate increasing cyber threats - The Cyber Incident Reporting for Critical Infrastructure Act (March 2022) requires covered entities to report incidents to CISA within 72 hours, and ransomware payments within 24 hours175 - The SEC's new rule (2023) mandates disclosure of material cybersecurity incidents in Form 8-K and periodic disclosure of risk management, strategy, and governance in Form 10-K176 - The Bank relies on electronic systems and employs preventative/detective tools against cyberattacks; despite these measures, the threat is severe and increasing, with a high risk of future significant events, though none have been detected to date178 Item 2. Properties The Company operates from its main office and numerous banking, loan, trust, and insurance offices in Ohio and Pennsylvania - At December 31, 2023, the Company operated from its main office, 64 full-service banking centers, 3 stand-alone loan production offices, five Farmers Trust offices, two Farmers Insurance offices, and a back-office operations facility179 Item 3. Legal Proceedings The Company is subject to various legal actions, which management believes will not have a material adverse effect - The Company is subject to pending and threatened legal actions, but management believes the outcome will not have a material adverse effect on results of operations or stockholders' equity, though future resolution could be material180 Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable181 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common shares trade on Nasdaq, with details on dividends, holders of record, and share repurchase programs - Farmers' common shares trade on the Nasdaq Capital Market under the symbol "FMNB"; as of March 1, 2024, there were approximately 4,097 holders of record182 - On March 1, 2023, the Board authorized a new repurchase program for up to 1,000,000 common shares, superseding the prior plan; during 2023, 502,953 shares were repurchased, leaving 497,047 shares available at year-end184 Common Stock Price Ranges and Dividends Paid Per Share | Quarter Ended | High | Low | Cash dividends paid per share | | :--- | :--- | :--- | :--- | | 2023 | | | | | March 31, 2023 | $15.08 | $11.56 | $0.17 | | June 30, 2023 | $13.31 | $10.82 | $0.17 | | September 30, 2023 | $14.25 | $11.25 | $0.17 | | December 31, 2023 | $14.72 | $10.38 | $0.17 | | 2022 | | | | | March 31, 2022 | $20.00 | $16.19 | $0.16 | | June 30, 2022 | $17.28 | $14.47 | $0.16 | | September 30, 2022 | $15.69 | $13.06 | $0.16 | | December 31, 2022 | $15.46 | $12.41 | $0.17 | Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Number of Shares that May Yet be Purchased Under the Program | | :--- | :--- | :--- | :--- | :--- | | Beginning balance | | | | 497,047 | | October | 0 | $0 | 0 | 497,047 | | November | 4,766 | $12.16 | 0 | 497,047 | | December | 437 | $14.09 | 0 | 497,047 | | Ending balance | 5,203 | $12.32 | 0 | 497,047 | Item 6. Reserved This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance for 2023, highlighting the Emclaire acquisition and interest rate impacts Results of Operations Net income decreased in 2023 due to higher funding costs and merger expenses, despite increased interest income - The decline in net interest margin was due to increased funding costs from Federal Reserve rate increases and an inverted U.S. treasury yield curve, causing deposit costs to rise faster than asset yields191 Net Income and EPS (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $49.9 million | $60.6 million | -$10.7 million | | Diluted EPS | $1.33 | $1.79 | -$0.46 | Net Interest Income and Margin (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $137.8 million | $124.2 million | +$13.6 million | | Tax-Equivalent Net Interest Margin | 2.91% | 3.18% | -0.27% | | Total Interest Income | $213.3 million | $142.1 million | +$71.2 million | | Interest Expense | $75.5 million | $17.9 million | +$57.6 million | Noninterest Income (2023 vs. 2022) | Category | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Noninterest Income | $41.9 million | $44.2 million | -$2.3 million | | Service charges on deposit accounts | $6.3 million | $4.7 million | +$1.6 million | | Bank owned life insurance income | $2.4 million | $1.8 million | +$0.6 million | | Trust fees | $10.1 million | $9.6 million | +$0.5 million | | Insurance agency commissions | $5.4 million | $4.4 million | +$1.0 million | | Net gains on sale of loans | $2.4 million | $2.1 million | +$0.3 million | | Debit card fees | $7.1 million | $5.8 million | +$1.3 million | | Legal settlement gain | $0 | $8.4 million | -$8.4 million | | Other operating income | $4.5 million | $4.0 million | +$0.5 million | Noninterest Expenses (2023 vs. 2022) | Category | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Noninterest Expense | $111.8 million | $94.4 million | +$17.4 million | | Salaries and employee benefits | $57.4 million | $45.0 million | +$12.4 million | | Occupancy and equipment expense | $15.4 million | $11.4 million | +$4.0 million | | FDIC insurance and state/local taxes | $5.8 million | $4.0 million | +$1.8 million | | Professional fees | $4.4 million | $6.1 million | -$1.7 million | | Merger related costs | $5.5 million | $4.1 million | +$1.4 million | | Intangible amortization expense | $3.4 million | $2.0 million | +$1.4 million | | Core processing charges | $4.6 million | $3.3 million | +$1.3 million | | Charitable donation | $0 | $6.0 million | -$6.0 million | | Other operating expenses | $13.4 million | $10.6 million | +$2.8 million | Income Tax Expense and Effective Tax Rate (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Income Tax Expense | $8.8 million | $12.2 million | -$3.4 million | | Effective Tax Rate | 14.9% | 16.8% | -1.9% | | Income Before Income Taxes | $58.7 million | $72.8 million | -$14.1 million | Loan Portfolio Total loans grew to $3.20 billion, driven by the Emclaire acquisition, with an increased allowance for credit losses - The Company adopted the CECL methodology on January 1, 2021, which requires estimating credit losses over the life of the loans, considering historical loss rates, qualitative adjustments, and forward-looking forecasts248253 Total Loans and Growth (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Loans | $3.20 billion | $2.40 billion | +$793.4 million | | Emclaire Acquisition Contribution | | | +$740.7 million | Loan Portfolio Composition (December 31, 2023) | Loan Category | Amount (in thousands) | Percentage of Total Loans | | :--- | :--- | :--- | | Commercial Real Estate | $1,334,600 | 41.6% | | Commercial | $347,819 | 10.9% | | Residential Real Estate | $986,032 | 30.8% | | Consumer | $267,875 | 8.4% | | Agricultural | $261,801 | 8.2% | | Total Loans | $3,198,127 | 100.0% | Allowance for Credit Losses (ACL) and Net Charge-Offs (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | ACL at End of Year | $34.4 million | $27.0 million | +$7.4 million | | Provision for Credit Losses | $9.7 million | $0.25 million | +$9.45 million | | Net Charge-Offs | $2.3 million | $2.7 million | -$0.4 million | | ACL to Total Loans Ratio | 1.08% | 1.12% | -0.04% | | Nonperforming Loans to Total Loans | 0.47% | 0.62% | -0.15% | Loan Commitments and Lines of Credit The Bank extends various credit commitments, with no significant loan concentrations disclosed - The Bank extends commitments for credit (mortgages, revolving lines, letters of credit) for periods of one month to one year, with no fees on unused portions, but an annual fee of 2% for letters of credit259 - As of December 31, 2023, there were no concentrations of loans exceeding 10% of total loans not already disclosed, and no other nonaccrual, past due, restructured, or non-performing interest-earning assets260 Investment Securities Debt securities available for sale increased to $1.30 billion, with the majority having maturities beyond ten years Investment Securities Carrying Value (2023 vs. 2022) | Security Type (in thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Debt securities available for sale | $1,299,701 | $1,268,025 | +$31,676 | | Other investments | $15,114 | $15,244 | -$130 | | Total securities | $1,314,815 | $1,283,269 | +$31,546 | Debt Securities by Maturity and Weighted Average Yield (December 31, 2023) | Type and Maturity Grouping | Fair Value (in thousands) | Weighted Average Yield | | :--- | :--- | :--- | | U.S. Treasury securities (Total) | $53,210 | 1.11% | | U.S. government sponsored enterprise debt securities (Total) | $74,745 | 2.47% | | Mortgage-backed securities - residential and collateralized mortgage obligations (Total) | $594,385 | 2.02% | | Small Business Administration (Total) | $2,917 | 2.11% | | Obligations of states and political subdivisions (Total) | $556,169 | 2.98% | | Corporate bonds (Total) | $18,275 | 6.86% | Premises and Equipment Premises and equipment increased by $13.6 million, primarily due to the Emclaire acquisition Premises and Equipment, Net (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Premises and equipment, net | $44.4 million | $30.8 million | +$13.6 million | | Emclaire Acquisition Contribution | | | +$14.8 million | Bank Owned Life Insurance The cash surrender value of bank-owned life insurance policies increased to $99.5 million, largely due to the Emclaire acquisition Bank Owned Life Insurance (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Cash surrender value | $99.5 million | $75.0 million | +$24.5 million | | Emclaire Acquisition Contribution | | | +$22.5 million | | Earnings on policies | $2.4 million | | | Deposits Total deposits increased to $4.2 billion, primarily due to the Emclaire acquisition, while brokered time deposits were paid off - Deposits in excess of the FDIC insurance limit were $1.37 billion at December 31, 2023269 Total Deposits and Growth (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Deposits | $4.2 billion | $3.6 billion | +$615.6 million | | Noninterest-bearing deposits | $1.0 billion | $0.9 billion | +$129.7 million | | Interest-bearing deposits | $3.2 billion | $2.5 billion | +$624.0 million | | Brokered time deposits | $0 | $138.1 million | -$138.1 million | Average Balances and Rates Paid on Deposits (2023 vs. 2022) | Deposit Type | 2023 Average Amount (in thousands) | 2023 Average Rate | 2022 Average Amount (in thousands) | 2022 Average Rate | | :--- | :--- | :--- | :--- | :--- | | Noninterest-bearing demand | $1,065,389 | 0.00% | $959,294 | 0.00% | | Interest-bearing demand | $1,415,425 | 1.95% | $1,392,058 | 0.54% | | Money market | $602,445 | 1.62% | $389,036 | 0.14% | | Savings | $511,116 | 0.03% | $457,382 | 0.02% | | Brokered time deposits | $132,895 | 4.67% | $56,965 | 2.18% | | Certificates of deposit | $654,717 | 2.97% | $360,687 | 0.84% | | Total | $4,381,987 | 1.44% | $3,615,422 | 0.64% | Short-Term Borrowings Short-term borrowings significantly increased to $355.0 million to offset declines in brokered and other deposit sources Short-Term Borrowings (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Short-term borrowings | $355.0 million | $95.0 million | +$260.0 million | | Emclaire Acquisition Contribution | | | +$75.0 million | Long-Term Borrowings Total long-term borrowings slightly increased to $88.7 million at December 31, 2023 Long-Term Borrowings (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total long-term borrowings | $88.7 million | $88.2 million | +$0.5 million | Stockholders' Equity Total stockholders' equity increased to $404.4 million, driven by the Emclaire merger and net income Stockholders' Equity (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total stockholders' equity | $404.4 million | $292.3 million | +$112.1 million | | Emclaire Acquisition Contribution | | | +$59.2 million | | Net Income | | | +$49.9 million | | Decline in AOCI | | | +$37.9 million | | Dividends Paid | | | -$25.6 million | | Treasury Stock Changes | | | -$11.7 million | Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements The Company's contractual obligations include deposits, borrowings, leases, and commitments to partnership investment funds - The Company has $13.1 million in commitments to various partnership investment funds (affordable housing tax credits and SBIC funds) to comply with CRA regulations, expected to be funded over the next ten years274 - Management does not engage in derivatives contracts for speculative trading; interest-rate swaps are used to manage interest rate risk275 Contractual Obligations (December 31, 2023) | Commitments (in thousands) | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Deposits without maturity | $3,452,104 | | | | | | | Certificates of deposit and brokered time deposits | $656,154 | $32,302 | $20,007 | $5,569 | $4,302 | $6,948 | | Long-term borrowings | $0 | $0 | $0 | $0 | $0 | $93,000 | | Leases | $1,175 | $1,092 | $975 | $898 | $917 | $5,659 | Liquidity The Bank's primary liquidity sources are deposits, loan repayments, and borrowings, monitored by the Asset/Liability Committee - Primary sources of funds for the Bank are deposits, loan and security repayments, borrowings from financial institutions, repurchase agreements, and FHLB advances276 - The Bank's Asset/Liability Committee (ALCO) monitors liquidity through various methods, including liquidity analysis and contingency funding analyses under stress scenarios277 Capital Resources Both Farmers and Farmers Bank met all capital adequacy requirements and were categorized as "well capitalized" at year-end 2023 - Farmers and Farmers Bank are subject to risk-based capital requirements (Basel III) and are monitored by the Federal Reserve Bank and FDIC278279 - At December 31, 2023, both the Company and the Bank met all capital adequacy requirements and were categorized as "well capitalized" under the regulatory framework for prompt corrective action278 Critical Accounting Policies Critical accounting policies involve significant judgment, particularly for the allowance for credit losses and goodwill impairment - Critical accounting policies include determining the adequacy of the allowance for credit losses (ACL), assessing impairment of goodwill and other intangibles, and estimating fair value of assets/liabilities in mergers280 - The ACL estimation under CECL involves significant judgment on macroeconomic forecasts (U.S. real GDP, PCE inflation, unemployment rate), historical loss experience, and risk characteristics282283284288 - A hypothetical adverse macroeconomic scenario could increase modeled credit losses by approximately $686 thousand for residential real estate loans and $1.12 million for commercial real non-owner occupied loans288289 - Goodwill and other intangible assets are tested for impairment annually (September 30), using discounted cash flow and market approaches; goodwill was $167.4 million at December 31, 2023, with no impairment detected294 Recent Accounting Pronouncements and Developments The Company adopted ASU 2020-04 related to Reference Rate Reform, with no material expected impact - The Company adopted ASU 2020-04 (amended by ASU 2021-01, deferred by ASU 2022-06) related to Reference Rate Reform, which simplifies accounting for contract modifications replacing LIBOR413 - The adoption of this standard is not expected to have a material effect on the Company's operating results or financial condition413 Item 7A. Quantitative and Qualitative Disclosure about Market Risk The Company's primary market exposure is interest rate risk, with up-rate scenarios currently exceeding internal policy limits - The Company's primary market exposure is interest rate risk, monitored using simulation analysis for Net Interest Income (NII) and Net Present Value of Equity (EVE)299300 - The inverted yield curve and elevated rates have caused up-rate scenarios for NII and EVE to exceed internal policy limits, a result of massive liquidity influx in 2020-2021, deployment at low rates, and subsequent deposit drains in an inflationary economy301 - To mitigate these results, the Company is prioritizing loan growth, shrinking its investment portfolio, and utilizing short-term wholesale funding to manage deposit shrinkage301302 Effect on Net Interest Income and Net Present Value of Equity from Interest Rate Changes | Changes In Interest Rate (basis points) | Net Interest Income Change (2023) | Net Present Value Of Equity Change (2023) | | :--- | :--- | :--- | | +400 | -6.2% | -36.4% | | +300 | -5.0% | -26.8% | | +200 | -3.4% | -17.3% | | +100 | -1.9% | -8.7% | | -100 | 1.4% | 5.3% | | -200 | 2.3% | 7.2% | | -300 | 3.1% | 5.1% | | -400 | 2.7% | 3.5% | Item 8. Financial Statements and Supplementary Financial Data This section presents the Company's audited consolidated financial statements and related reports for the year ended December 31, 2023 MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management concluded that internal controls over financial reporting were effective as of December 31, 2023 - Management is responsible for internal control over financial reporting and assessed its effectiveness as of December 31, 2023, based on the COSO framework, concluding it was effective307309 - Crowe LLP, the independent registered public accounting firm, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2023310 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Crowe LLP) Crowe LLP issued an unqualified opinion on the financial statements, identifying two critical audit matters - Crowe LLP issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023315 - Critical audit matters included the Allowance for Credit Losses on Loans, due to significant subjective and complex judgments in model assumptions (cohort and PD/LGD) and qualitative factors323324325 - Another critical audit matter was the fair value of acquired loans ($740.7 million) and the core deposit intangible ($19.2 million) from the Emclaire acquisition, involving subjective auditor judgment and specialized skills326 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CliftonLarsonAllen LLP) CliftonLarsonAllen LLP provided an unqualified opinion on the Company's financial statements for the two years ended December 31, 2022 - CliftonLarsonAllen LLP issued an unqualified opinion on the Company's consolidated financial statements for the two years ended December 31, 2022, confirming fair presentation in accordance with GAAP332 CONSOLIDATED BALANCE SHEETS Total assets increased to $5.08 billion in 2023, driven by loan growth and goodwill from the Emclaire acquisition Consolidated Balance Sheet Highlights (December 31, 2023 vs. 2022) | Asset/Liability/Equity | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | TOTAL ASSETS | $5,078,350 | $4,082,200 | +$996,150 | | NET LOANS | $3,163,687 | $2,377,772 | +$785,915 | | Goodwill | $167,446 | $94,640 | +$72,806 | | TOTAL DEPOSITS | $4,177,386 | $3,561,768 | +$615,618 | | Short-term borrowings | $355,000 | $95,000 | +$260,000 | | TOTAL LIABILITIES | $4,673,935 | $3,789,905 | +$884,030 | | TOTAL STOCKHOLDERS' EQUITY | $404,415 | $292,295 | +$112,120 | CONSOLIDATED STATEMENTS OF INCOME Net income decreased to $49.9 million in 2023 due to a significant increase in interest expense that outpaced interest income growth Consolidated Statements of Income Highlights (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | TOTAL INTEREST AND DIVIDEND INCOME | $213,335 | $142,086 | $116,459 | | TOTAL INTEREST EXPENSE | $75,549 | $17,920 | $8,469 | | NET INTEREST INCOME | $137,786 | $124,166 | $107,990 | | Provision for credit losses | $8,718 | $250 | $4,649 | | TOTAL NONINTEREST INCOME | $41,861 | $44,202 | $38,193 | | TOTAL NONINTEREST EXPENSE | $111,796 | $94,411 | $79,176 | | INCOME BEFORE INCOME TAXES | $58,698 | $72,835 | $62,114 | | INCOME TAXES | $8,766 | $12,238 | $10,270 | | NET INCOME | $49,932 | $60,597 | $51,844 | | Basic EPS | $1.34 | $1.79 | $1.78 | | Diluted EPS | $1.33 | $1.79 | $1.77 | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Total comprehensive income was $87.9 million in 2023, a significant recovery from a loss in 2022 Consolidated Statements of Comprehensive Income Highlights (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | NET INCOME | $49,932 | $60,597 | $51,844 | | Net unrealized holding gains (losses) on available for sale securities | $48,805 | $(278,620) | $(15,333) | | Unrealized holding gains (losses), net of reclassification and tax | $37,937 | $(219,782) | $(12,775) | | TOTAL COMPREHENSIVE INCOME (LOSS) | $87,868 | $(159,188) | $39,107 | CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Total stockholders' equity increased to $404.4 million, driven by net income and the Emclaire acquisition Consolidated Statements of Stockholders' Equity Highlights (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Balance December 31 | $404,415 | $292,295 | | Net income | $49,932 | $60,597 | | Other comprehensive income (loss) | $37,936 | $(219,785) | | Share issuance as part of a business combination | $59,202 | $0 | | Dividends paid | $(25,550) | $(22,118) | | Treasury share purchases | $(11,660) | $0 | CONSOLIDATED STATEMENTS OF CASH FLOWS Net cash from operating activities decreased, while investing activities generated cash due to proceeds from securities Consolidated Statements of Cash Flows Highlights (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | NET CASH FROM OPERATING ACTIVITIES | $62,306 | $80,739 | $54,933 | | NET CASH FROM INVESTING ACTIVITIES | $77,936 | $(205,507) | $(423,613) | | NET CASH FROM FINANCING ACTIVITIES | $(112,135) | $87,529 | $226,849 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $28,107 | $(37,239) | $(141,831) | | Ending cash and cash equivalents | $103,658 | $75,551 | $112,790 | Supplemental Noncash Disclosures (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Issuance of stock for business combinations | $59,202 | $0 | $98,921 | | Issuance of stock awards | $1,913 | $2,184 | $2,136 | | Transfer of loans to loans held for sale | $7,510 | $0 | $0 | | Lease liabilities assumed from obtaining right-of-use assets | $1,289 | $1,628 | $0 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The notes provide detailed information on the Company's financial statements and significant accounting policies NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the Company's accounting policies, including consolidation, use of estimates, and the CECL methodology - The Company's consolidated financial statements include Farmers National Banc Corp. and its wholly-owned subsidiaries: The Farmers National Bank of Canfield, Farmers Trust Company, Farmers National Insurance, LLC, and Farmers of Canfield Investment Co351352 - Business combinations are accounted for using the acquisition method, measuring identifiable assets and liabilities at fair value on the acquisition date354 - Debt securities available for sale are carried at fair value, with unrealized gains/losses in other comprehensive income; equity securities with readily determinable fair values are carried at fair value, with changes reported in net income356 - The Company adopted the CECL model on January 1, 2021, for calculating the allowance for credit losses (ACL), which estimates expected losses over the life of loans using historical experience, current conditions, and reasonable forecasts370371384385 - Goodwill is not amortized but tested for impairment annually (September 30); core deposit intangibles are amortized over 7-8 years, and customer relationship/trade name intangibles over 13-15 years on an accelerated method400 NOTE 2 – BUSINESS COMBINATIONS The Company completed its merger with Emclaire Financial Corp for approximately $92.6 million, resulting in $72.9 million in goodwill - On January 1, 2023, Farmers completed the merger with Emclaire Financial Corp. for approximately $92.6 million (stock and cash), expanding into the Pittsburgh market414415 - The acquisition resulted in $72.9 million in goodwill, attributable to synergies and the strategy to enhance/expand presence in Pennsylvania416 Emclaire Acquisition Consideration and Net Assets Acquired (January 1, 2023) | Category | Amount (in thousands) | | :--- | :--- | | Consideration: | | | Cash | $33,440 | | Stock | $59,202 | | Fair value of total consideration transferred | $92,642 | | Fair value of assets acquired: | | | Cash and cash equivalents | $20,265 | | Securities available for sale | $126,970 | | Loans, net | $740,659 | | Premises and equipment | $14,808 | | Bank owned life insurance | $22,485 | | Core deposit intangible | $19,249 | | Total assets acquired | $977,621 | | Fair value of liabilities assumed: | | | Deposits | $875,813 | | Short-term borrowings | $75,000 | | Total liabilities | $957,917 | | Net assets acquired | $19,704 | | Goodwill created | $72,938 | | Total net assets acquired | $92,642 | Unaudited Pro Forma Information (Emclaire Acquisition as of Jan 1, 2022) | Metric | 2022 (in thousands) | | :--- | :--- | | Net interest income | $168,692 | | Provision for credit losses | $17,246 | | Noninterest income | $47,206 | | Noninterest expense | $137,930 | | Income before income taxes | $60,722 | | Income tax expense | $10,007 | | Net income | $50,715 | | Basic earnings per share | $1.34 | | Diluted earnings per share | $1.33 | NOTE 3 – SECURITIES AVAILABLE FOR SALE The available-for-sale securities portfolio had a fair value of $1.30 billion with significant unrealized losses of $222.6 million - As of December 31, 2023, 743 out of 978 securities were in an unrealized loss position, primarily due to changes in non-credit related factors like interest rates, not credit deterioration431 - The Company has not recorded an allowance for credit losses on AFS securities and has the ability and intent to hold them for a sufficient period to allow for fair value recovery431 Available-for-Sale Securities Portfolio (December 31, 2023) | Security Type | Amortized Cost (in thousands) | Gross Unrealized Gains (in thousands) | Gross Unrealized Losses (in thousands) | Fair Value (in thousands) | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury and U.S. government entities | $145,439 | $113 | $(17,597) | $127,955 | | State and political subdivisions | $644,880 | $4,792 | $(93,503) | $556,169 | | Corporate bonds | $18,554 | $187 | $(466) | $18,275 | | Mortgage-backed securities - residential | $624,529 | $1 | $(104,144) | $520,386 | | Collateralized mortgage obligations | $80,227 | $331 | $(6,559) | $73,999 | | Small Business Administration | $3,212 | $0 | $(295) | $2,917 | | Totals | $1,516,841 | $5,424 | $(222,564) | $1,299,701 | Proceeds from Sales of AFS Securities and Associated Gains/Losses | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Proceeds | $85,306 | $37,190 | $35,175 | | Gross gains | $441 | $6 | $863 | | Gross losses | $(939) | $(421) | $(25) | NOTE 4 – LOANS Loan balances increased to $3.19 billion, with the allowance for credit losses increasing to $34.4 million - Nonperforming loans to total loans decreased from 0.62% at December 31, 2022, to 0.47% at December 31, 2023252 - The Company adopted ASU 2022-02, eliminating the recognition of troubled debt restructurings (TDRs); loan modifications for borrowers experiencing financial difficulty are now evaluated for direct changes in contractual cash flows440 Loan Balances by Type (December 31, 2023 vs. 2022) | Loan Type (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Commercial real estate | $1,538,756 | $1,183,850 | | Commercial | $404,692 | $351,730 | | Residential real estate | $986,138 | $607,970 | | Consumer | $259,784 | $221,260 | | Total originated loans | $3,189,370 | $2,397,860 | | Net deferred loan costs | $8,757 | $6,890 | | Allowance for credit losses | $(34,440) | $(26,978) | | Net loans | $3,163,687 | $2,377,772 | Allowance for Credit Losses Activity by Portfolio Segment (2023) | Segment (in thousands) | Beginning Balance | PCD ACL on loans acquired | Provision for credit losses | Loans charged off | Recoveries | Total Ending Allowance Balance | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commercial Real Estate | $14,840 | $850 | $2,808 | $(349) | $1 | $18,150 | | Commercial | $4,186 | $138 | $1,931 | $(1,272) | $104 | $5,087 | | Residential Real Estate | $4,374 | $11 | $2,834 | $(384) | $81 | $6,916 | | Consumer | $3,578 | $0 | $1,145 | $(932) | $496 | $4,287 | | Total | $26,978 | $999 | $8,718 | $(2,937) | $682 | $34,440 | Nonperforming Loans (December 31, 2023) | Category (in thousands) | Nonaccrual with no allowance for credit loss | Nonaccrual with an allowance for credit loss | Loans past due over 89 days still accruing | | :--- | :--- | :--- | :--- | | Commercial real estate | $3,880 | $2,310 | $0 | | Commercial | $597 | $1,725 | $0 | | Residential real estate | $588 | $3,219 | $529 | | Consumer | $87 | $374 | $126 | | Total loans | $5,052 | $7,728 | $655 | NOTE 5 – REVENUE FROM CONTRACTS WITH CUSTOMERS This note details the Company's noninterest income by revenue stream and reportable segment, recognized under ASC 606 - Service charges on deposit accounts, debit card and EFT fees, trust fees, insurance agency commissions, retirement plan consulting fees, and investment commissions are recognized based on satisfied performance obligations, with immaterial variable consideration or time lags471473474475478479 - Other income items, including bank-owned life insurance income, security gains, net gains on loan sales, and a one-time legal settlement in 2022, are generally outside the scope of ASC 606 or deemed immaterial480 Noninterest Income by Revenue Stream and Segment (2023) | Revenue Stream (in thousands) | Trust Segment | Bank Segment | Totals | | :--- | :--- | :--- | :--- | | Service charges on deposit accounts | $0 | $6,322 | $6,322 | | Debit card and EFT fees | $0 | $7,059 | $7,059 | | Trust fees | $10,108 | $0 | $10,108 | | Insurance agency commissions | $0 | $5,444 | $5,444 | | Retirement plan consulting fees | $1,406 | $0 | $1,406 | | Investment commissions | $0 | $1,978 | $1,978 | | Other (outside ASC 606 scope) | $0 | $9,544 | $9,544 | | Total noninterest income | $11,514 | $30,347 | $41,861 | NOTE 6 – LOAN SERVICING The Company retains servicing rights for mortgage loans, with total serviced loans increasing to $572.5 million in 2023 - The fair value of mortgage servicing rights was $5.39 million at December 31, 2023, and $5.28 million at December 31, 2022390 Mortgage Loan Portfolios Serviced for Others (2023 vs. 2022) | Serviced For | 2023 (in thousands) | 2022 (in thousands) | | :--- | :--- | :--- | | FHLMC | $544,140 | $532,868 | | FHLB Pittsburgh | $28,405 | $0 | | Ending balance | $572,545 | $532,868 | Mortgage Servicing Rights Activity (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Beginning balance | $3,331 | $3,403 | $3,198 | | Additions | $588 | $960 | $1,556 | | Acquired in merger | $305 | $0 | $0 | | Amortization to expense | $(735) | $(1,015) | $(1,351) | | Change in valuation allowance | $(37) | $(17) | $0 | | Ending balance | $3,452 | $3,331 | $3,403 | NOTE 7 – FAIR VALUE The Company measures financial instruments at fair value using a three-level hierarchy based on input observability - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)484485 - Investment securities, loans held for sale, mortgage banking derivatives, loan servicing rights, and interest rate swaps are primarily valued using Level 2 inputs487489490491492 - Collateral-dependent loans and other real estate owned (OREO) often use Level 3 inputs due to significant unobservable adjustments in appraisals or other valuation methods494495 - No significant transfers between Level 1 and Level 2 occurred during 2023 or 2022498 Assets Measured at Fair Value on a Recurring Basis (December 31, 2023) | Financial Assets (in thousands) | Carrying Value | Level 1 | Level 2 | Level 3 | | :--- | :--- | :--- | :--- | :--- | | Investment securities available-for-sale | $1,299,701 | $0 | $1,298,361 | $1,340 | | Equity securities | $226 | $226 | $0 | $0 | | Loans held for sale | $3,711 | $0 | $3,711 | $0 | | Interest rate swaps | $4,191 | $0 | $4,191 | $0 | | Interest rate lock commitments | $109 | $0 | $109 | $0 | | Financial Liabilities | | | | | | Interest rate swaps | $4,191 | $0 | $4,191 | $0 | | Fair value hedge derivative | $836 | $0 | $836 | $0 | | Mortgage banking derivative | $14 | $0 | $14 | $0 | NOTE 8 – PREMISES AND EQUIPMENT Net premises and equipment increased to $44.4 million, primarily due to the Emclaire acquisition - The increase in premises and equipment was primarily due to the Emclaire acquisition, which added $14.8 million265 - Depreciation expense was $3.4 million for 2023, $2.5 million for 2022, and $1.8 million for 2021506 Premises and Equipment (December 31, 2023 vs. 2022) | Category (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Land | $10,134 | $6,200 | | Buildings | $40,291 | $30,296 | | Furniture, fixtures and equipment | $20,281 | $18,474 | | Leasehold Improvements | $3,440 | $1,347 | | Less accumulated depreciation | $(29,782) | $(25,553) | | Net book value | $44,364 | $30,764 | NOTE 9 – LEASES The Company holds operating leases for branch offices and equipment, with a right-of-use asset of $8.8 million - The Company has operating leases for branch offices, vehicles, and office equipment, with remaining terms up to 17.6 years507 - The Emclaire merger added an initial right-of-use asset and lease liability of $1.3 million510 Lease Balances (December 31, 2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Right of use asset | $8,800 | $8,400 | | Lease liability | $9,000 | $8,800 | Maturities of Lease Liabilities (December 31, 2023) | Year | Total Payments (in thousands) | | :--- | :--- | | 2024 | $1,175 | | 2025 | $1,092 | | 2026 | $975 | | 2027 | $898 | | 2028 | $917 | | Thereafter | $5,659 | | Total Payments | $10,716 | | Less: Imputed Interest | $(1,738) | | Total | $8,978 | NOTE 10 – GOODWILL AND INTANGIBLE ASSETS Goodwill totaled $167.4 million at year-end 2023, with no impairment detected - Goodwill increased due to the Emclaire acquisition in January 2023 and Champion Insurance in July 2022; no goodwill impairment was detected in the annual test as of September 30, 2023512 - Aggregate intangible amortization expense was $3.4 million for 2023, $2.0 million for 2022, and $1.4 million for 2021513 Goodwill and Other Intangibles (December 31, 2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Goodwill | $167,446 | $94,640 | | Other intangibles, net | $22,842 | $7,026 | | Total | $190,288 | $101,666 | Acquired Intangible Assets (December 31, 2023) | Intangible Type | Gross Carrying Amount (in thousands) | Accumulated Amortization (in thousands) | | :--- | :--- | :--- | | Customer relationship intangibles | $7,210 | $(6,953) | | Non-compete contracts | $457 | $(413) | | Trade Name | $1,126 | $(440) | | Core deposit intangible | $32,115 | $(10,260) | | Total | $40,908 | $(18,066) | NOTE 11 - DEPOSITS Total deposits increased to $4.18 billion, while brokered time deposits were reduced to zero - Time deposits of $250 thousand or more were $258.2 million at year-end 2023, up from $135.7 million in 2022515 Summary of Year-End Deposits (2023 vs. 2022) | Deposit Type (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Noninterest-bearing demand | $1,026,630 | $896,957 | | Interest-bearing demand | $1,362,609 | $1,224,884 | | Money market | $593,975 | $435,369 | | Savings | $468,890 | $441,978 | | Brokered time deposits | $0 | $138,051 | | Certificates of deposit | $725,282 | $424,529 | | Total | $4,177,386 | $3,561,768 | Scheduled Maturities of Brokered Deposits and Certificates of Deposit (December 31, 2023) | Year | Amount (in thousands) | | :--- | :--- | | 2024 | $656,154 | | 2025 | $32,302 | | 2026 | $20,007 | | 2027 | $5,569 | | 2028 | $4,302 | | Thereafter | $6,948 | | Total | $725,282 | NOTE 12 – SHORT-TERM BORROWINGS Short-term borrowings significantly increased to $355.0 million to manage liquidity and offset deposit declines - The increase in short-term borrowings was due to $75.0 million acquired in the Emclaire merger and the use of borrowings to offset declines in brokered time deposits and other deposit sources270 - The Bank has access to a $25.0 million line of credit with a major domestic bank, and Farmers has a $5.0 million unsecured revolving line of credit, both with no outstanding balances at December 31, 2023 and 2022519520 Short-Term Borrowings (December 31, 2023 vs. 2022) | Source (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | FHLB advances | $70,000 | $95,000 | | Other short-term borrowings | $285,000 | $0 | | Total short-term borrowings | $355,000 | $95,000 | NOTE 13 – LONG-TERM BORROWINGS Total long-term borrowings were $88.7 million, primarily consisting of subordinated notes and junior subordinated debt - In November 2021, the Company issued $75.0 million in fixed-to-floating rate subordinated notes due December 15, 2031, with a fixed rate of 3.125% for five years, then converting to a floating rate (3-month SOFR + 220 bps)523 - The Company assumed junior subordinated debt securities from the Cortland (2021), Maple Leaf (2020), and National Bancshares Corporation (2015) acquisitions, which qualify as Tier 1 capital for regulatory purposes524525526527 Long-Term Borrowings (December 31, 2023 vs. 2022) | Category (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total junior subordinated debentures owed to unconsolidated subsidiary trusts | $14,643 | $14,316 | | Subordinated debentures | $74,020 | $73,895 | | Total long-term borrowings | $88,663 | $88,211 | NOTE 14 – COMMITMENTS AND CONTINGENT LIABILITIES The Company has off-balance-sheet credit instruments totaling $798.5 million in loan commitments and unused lines of credit - The Company has committed up to a $20.2 million subscription in SBIC investment funds, with $16.4 million invested as of December 31, 2023531 Contractual Amounts of Financial Instruments with Off-Balance-Sheet Risk (December 31, 2023 vs. 2022) | Category (in thousands) | 2023 Fixed Rate | 2023 Variable Rate | 2022 Fixed Rate | 2022 Variable Rate | | :--- | :--- | :--- | :--- | :--- | | Commitments and unused lines of credit | $150,697 | $647,843 | $111,889 | $513,614 | | Standby letters of credit | | | | | | Contractual value | $6,800 | | $8,800 | | NOTE 15 – STOCK BASED COMPENSATION The Company's 2022 Equity Incentive Plan allows for the award of up to one million shares to directors and employees - The 2022 Equity Incentive Plan permits awards of up to one million shares to directors and employees, replacing the 2017 Plan532 - In 2023, 105,891 service-time-based and 102,750 performance-based share awards were granted; as of December 31, 2023, 734,859 shares were available for award532 - Stock-based compensation expense was $2.6 million for 2023, $1.8 million for 2022, and $1.2 million for 2021; total unrecognized compensation expense related to nonvested shares was $3.2 million as of December 31, 2023533 NOTE 16 – REGULATORY MATTERS Both Farmers and Farmers Bank exceeded all minimum capital ratios and were categorized as "well capitalized" - Farmers and Farmers Bank are subject to Basel III capital requirements and prompt corrective action regulations536539 - At December 31, 2023, both the Company and the Bank met all capital adequacy requirements and were categorized as "well capitalized"535540 - The capital conservation buffer was 2.5% for 2023 and 2022, requiring an additional capital amount of $92.4 million at year-end 2023538 - At year-end 2023, the Bank could declare approximately $61.2 million in dividends without prior regulatory approval, and Farmers Trust could declare $753 thousand541 Actual and Required Capital Ratios (December 31, 2023) | Capital Ratio | Entity | Actual Ratio | Minimum for Adequacy | Minimum for Well Capitalized | | :--- | :--- | :--- | :--- | :--- | | Common equity tier 1 capital ratio | Consolidated | 10.61% | 4.5% | N/A | | | Bank | 11.15% | 4.5% | 6.5% | | Total risk based capital ratio | Consolidated | 14.06% | 8.0% | N/A | | | Bank | 12.13% | 8.0% | 10.0% | | Tier I risk based capital ratio | Consolidated | 11.10% | 6.0% | N/A | | | Bank | 11.15% | 6.0% | 8.0% | | Tier I leverage ratio | Consolidated | 8.02% | 4.0% | N/A | | | Bank | 8.07% | 4.0% | 5.0% | NOTE 17 – EMPLOYEE BENEFIT PLANS The Company offers various employee benefit plans, including a 401(k) plan and deferred compensation plans - The Company's 401(k) Retirement Savings Plan includes a 50% match up to 6% of gross wages; total expense for the 401(k) plan was $1.0 million in 2023544 - The Company maintains deferred compensation plans for certain retirees and a nonqualified plan for select management, with recorded assets and liabilities of $3.4 million and $2.5 million, respectively, at year-end 2023546547 - Supplemental retirement benefit plans for officers and directors, including those from NBOH, Cortland, and Emclaire acquisitions, had accumulated liabilities totaling $751 thousand (NBOH), $1.0 million (Cortland), and $846 thousand (Emclaire) at December 31, 2023548549551 NOTE 18 – INCOME TAXES Income tax expense decreased to $8.8 million in 2023, with an effective tax rate of 14.9% - No valuation allowance for deferred tax assets was recorded at December 31, 2023 and 2022552 Provision for Income Taxes (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Current expense | $9,230 | $10,885 | $10,794 | | Deferred expense (benefit) | $(464) | $1,353 | $(524) | | Totals | $8,766 | $12,238 | $10,270 | Effective Tax Rate Reconciliation (2023 vs. 2022 vs. 2021) | Factor (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Statutory tax (21%) | $12,327 | $15,295 | $13,026 | | Effect of nontaxable interest | $(2,040) | $(2,591) | $(2,274) | | Bank owned life insurance, net | $(513) | $(380) | $(273) | | Tax credit investments | $(366) | $(194) | $(200) | | Effect of nontaxable insurance premiums | $(404) | $(318) | $(322) | | Stock compensation | $41 | $(63) | $(9) | | Other | $(279) | $489 | $322 | | Actual tax | $8,766 | $12,238 | $10,270 | Net Deferred Tax Asset (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Gross deferred tax assets | $70,102 | $66,640 | | Gross deferred tax liabilities | $(4,583) | $(7,316) | | Net deferred tax asset | $65,519 | $59,324 | NOTE 19 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive loss improved to $172.6 million, driven by unrealized gains on securities - The net current period other comprehensive income (loss) was $37.9 million in 2023, a significant improvement from a loss of $219.8 million in 2022556 Changes in Accumulated Other Comprehensive Income (Loss), Net of Tax (2023 vs. 2022) | Component (in thousands) | Beginning Balance (2023) | Net Current Period Other Comprehensive Income (Loss) (2023) | Ending Balance (2023) | | :--- | :--- | :--- | :--- | | Net unrealized holding gains (losses) on available for sale securities | $(210,489) | $38,950 | $(171,539) | | Reclassification adjustment for (gains) losses realized in income on fair value hedge | $0 | $(1,013) | $(1,013) | | Change in funded status of post-retirement plan | $(1) | $(1) | $(2) | | Total | $(210,490) | $37,936 | $(172,554) | NOTE 20 – RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates increased to $13.0 million at year-end 2023 Loans to Related Parties (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Beginning balance | $10,491 | $11,074 | | New loans | $4,404 | $983 | | Repayments | $(1,941) | $(1,566) | | Ending balance | $12,954 | $10,491 | Deposits from Related Parties (2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Deposits from principal officers, directors, and their affiliates | $13,400 | $18,300 | NOTE 21 – EARNINGS PER SHARE Diluted earnings per share decreased to $1.33 in 2023 from $1.79 in 2022 - 194,599 restricted stock awards were considered anti-dilutive at year-end 2023558 Earnings Per Share Computation (2023 vs. 2022 vs. 2021) | Metric | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Basic EPS | | | | | Net income (in thousands) | $49,932 | $60,597 | $51,844 | | Weighted average shares outstanding | 37,384,122 | 33,844,945 | 29,167,357 | | Basic earnings per share | $1.34 | $1.79 | $1.78 | | Diluted EPS | | | | | Net income (in thousands) | $49,932 | $60,597 | $51,844 | | Weighted average shares for basic EPS | 37,384,122 | 33,844,945 | 29,167,357 | | Average unvested restricted stock awards | 114,147 | 83,994 | 112,430 | | Weighted average shares for diluted EPS | 37,498,269 | 33,928,939 | 29,279,787 | | Diluted earnings per share | $1.33 | $1.79 | $1.77 | NOTE 22 – DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swaps to manage interest rate risk for commercial loans and its municipal bond portfolio - The Company uses interest rate swaps for commercial loan customers to manage interest rate risk, offsetting exposure with third parties; these are not designated as hedges559 - The Company has an interest rate swap designated as a fair value hedge for its municipal bond portfolio, with a notional amount of $100.0 million and a fair value of $(836) thousand at December 31, 2023561 - Mortgage banking derivatives (interest rate locks and forward commitments) are used to economically hedge interest rate risk and are not designated in hedge relationships562 Interest Rate Swaps Associated with Commercial Loans (December 31, 2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Notional value | $63,900 | $71,900 | | Fair value (other assets) | $4,200 | $5,500 | | Fair value (other liabilities) | $4,200 | $5,500 | NOTE 23 – SEGMENT INFORMATION The Company reports financial performance in two segments: Bank and Trust, with the Bank segment being the primary revenue generator - The Company's reportable segments are Bank (including Farmers Insurance and Investment) and Trust, distinguished by products and services offered564565567 Segment Net Income (2023 vs. 2022 vs. 2021) | Segment (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Trust Segment Net Income | $3,680 | $8,661 | $3,211 | | Bank Segment Net Income | $50,848 | $55,935 | $50,032 | | Eliminations and Others | $(4,596) | $(3,999) | $(1,399) | | Consolidated Net Income | $49,932 | $60,597 | $51,844 | Segment Net Interest Income (2023 vs. 2022 vs. 2021) | Segment (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Trust Segment Net Interest Income | $257 | $172 | $134 | | Bank Segment Net Interest Income | $141,444 | $127,353 | $108,726 | | Eliminations | $(3,915) | $(3,359) | $(870) | | Consolidated Net Interest Income | $137,786 | $124,166 | $107,990 | NOTE 24 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION The parent company's primary income source is dividends from subsidiaries, totaling $24.0 million in 2023 Parent Company Only Balance Sheet (December 31, 2023 vs. 2022) | Metric (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Total assets | $495,319 | $383,048 | | Total liabilities | $90,904 | $90,753 | | Total stockholders' equity | $404,415 | $292,295 | Parent Company Only Statements of Income (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total Income | $24,044 | $39,400 | $49,696 | | Interest on borrowings | $4,086 | $3,428 | $918 | | Other expenses | $4,109 | $3,451 | $2,792 | | Income before income tax benefit and undistributed subsidiary income | $15,849 | $32,521 | $45,986 | | Income tax benefit | $1,624 | $1,345 | $611 | | Equity in undistributed net income of subsidiaries | $32,459 | $26,731 | $5,247 | | Net Income | $49,932 | $60,597 | $51,844 | Parent Company Only Statements of Cash Flows (2023 vs. 2022 vs. 2021) | Metric (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $22,954 | $34,425 | $53,443 | | Net cash from investing activities | $(33,440) | $0 | $(29,618) | | Net cash from financing activities | $(36,940) | $(22,004) | $59,513 | | Net change in cash and cash equivalents | $(47,426) | $12,421 | $83,338 | | Ending cash and cash equivalents | $57,071 | $104,497 | $92,076 | NOTE 25 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS The Company invests in qualified affordable housing projects, with a balance of $17.9 million at year-end 2023 - Unfunded commitments are expected to be fulfilled by the year ending 2037571 Qualified Affordable Housing Project Investments (2023 vs.