Farmers National Banc Corp. — Q1 2021 Form 10-Q
Business context and reporting period. Farmers National Banc Corp. is an Ohio-based financial holding company serving northeastern Ohio and western Pennsylvania through banking, trust, retirement consulting, and insurance businesses. This unaudited report covers the quarter ended March 31, 2021; income and cash flow comparisons are against Q1 2020, while balance-sheet comparisons are against December 31, 2020. The company adopted CECL on January 1, 2021.
Key financial results
- Profitability: Net income was $14.6 million, up from $8.6 million; diluted EPS was $0.51 versus $0.30. Return on average assets was 1.87% (1.32% in Q1 2020), and return on average equity was 16.81% (11.53%).
- Interest income and margin: Net interest income rose to $25.3 million from $22.3 million. Net interest margin declined 17 basis points to 3.58%; excluding PPP loan interest and fees, management reported a non-GAAP margin of 3.43%. Asset yields fell 72 basis points, while the cost of interest-bearing liabilities fell 68 basis points.
- Noninterest income and expense: Noninterest income increased 34.5% to $10.6 million, including higher mortgage loan-sale gains, trust fees, insurance commissions, and debit-card fees. Deposit service charges fell 26.2%. Noninterest expense declined 5.2% to $17.8 million, largely because merger-related costs fell from $1.3 million to $12,000. The efficiency ratio improved to 48.24% from 59.72%.
- Credit costs and asset quality: Provision for credit losses was $425,000, compared with $1.1 million. Net charge-offs were $84,000, versus $635,000. Nonperforming loans were $11.6 million, or 0.57% of loans; the allowance for credit losses was $24.9 million, or 1.22% of loans. The allowance includes a $2.5 million increase recorded at CECL adoption; prior-period allowance comparisons use the previous accounting model.
- Balance sheet and liquidity: Total assets were $3.32 billion, up from $3.07 billion at year-end. Cash and cash equivalents were $326.4 million, and available-for-sale securities were $802.9 million. Gross loans were $2.04 billion, down $40.6 million since year-end; deposits grew $222.2 million to $2.83 billion. Management said it expects cash to decline toward year-end levels as funds are deployed into loans and securities.
- Debt and capital: Short- and long-term borrowings totaled approximately $79.7 million, including $65.0 million of FHLB advances and $9.5 million of trust-preferred debentures. The Bank had approximately $545.1 million of additional FHLB borrowing capacity and an unused $35 million credit line. Consolidated common equity tier 1, total risk-based capital, and leverage ratios were 13.49%, 15.10%, and 9.69%, respectively; the Bank was classified as well capitalized.
- Cash flow and equity: Operating activities provided $7.0 million; investing activities used $154.9 million, principally for securities purchases; financing activities provided $219.7 million, mainly from deposit growth. Stockholders’ equity was $347.4 million, down $2.7 million from year-end, primarily reflecting the decline in securities’ fair value recorded in other comprehensive income. The company reported a $12.1 million after-tax OCI loss, leaving total comprehensive income of $2.5 million.
Material changes and unusual items
- Income growth reflected stronger noninterest income, lower interest expense, and reduced noninterest expense; Q1 2020 included substantial Maple Leaf acquisition-related costs. The Maple Leaf acquisition closed in January 2020, so year-over-year comparisons are affected by the differing periods of ownership and merger costs.
- Available-for-sale securities increased $227.3 million from year-end, while their net unrealized losses reduced accumulated OCI. Management attributed the losses to noncredit factors, principally market-rate and spread changes, and recorded no securities credit-loss allowance.
- CECL adoption resulted in a $1.9 million after-tax reduction to retained earnings and a $2.5 million increase in the loan allowance. The company did not elect to phase in the initial capital impact.
- PPP activity included $199.8 million of first-round loans facilitated for 1,714 businesses; SBA forgiveness payments received totaled $137.2 million by quarter-end. The company also funded $75.1 million in second-round PPP loans.
Outlook, risks, and contingencies
- No specific earnings, margin, loan-growth, or other financial guidance is provided. Management cited continued uncertainty from COVID-19, low interest rates, competitive lending conditions, and the possibility of future borrower credit deterioration. It said the full effects of the pandemic could not be projected.
- Five loans remained on payment deferral at quarter-end, totaling $16.6 million; management cautioned that future credit losses could require reversal of accrued interest and fees. Fee waivers since the start of the pandemic totaled $780,000.
- COVID-sensitive industry loans totaled $94.8 million, or 4.65% of loans, concentrated in restaurants/catering ($44.4 million) and hotels ($41.8 million). Total unused loan commitments were $456.3 million.
- Interest-rate sensitivity simulations showed a 14.9% decline in net present value of equity under a 100-basis-point rate decrease, exceeding the company’s 10% internal guideline. Management attributed the exception in part to the limited ability to reduce rates on core deposits and said it would continue monitoring the position. The company described its balance sheet as slightly asset-sensitive and warned that persistently low rates could pressure margin.
- Management stated that liquidity was adequate and capital sufficient to withstand an extended recession, while warning that further credit losses could affect capital and potentially constrain dividends. Ordinary-course lawsuits are pending; the company said an unfavorable resolution could materially affect results in a particular future period, but the amount and timing are unknown.
- The filing identifies a proposed increase in the federal corporate tax rate from 21% to 28% as a potential future earnings risk if enacted. Management also cited regulatory, competitive, technology, economic, and market risks.
Most important facts for investors to verify
- Whether the strong earnings growth and improved efficiency persist after the unusually low Q1 2020 comparison and higher mortgage-sale gains.
- How the CECL allowance and credit quality evolve, particularly for deferred borrowers and commercial real estate exposures.
- Whether the lower net interest margin stabilizes, given rate sensitivity, PPP effects, and continued low interest rates.
- Whether securities-market declines remain noncredit-related and how further OCI losses affect book value and capital.
- Deposit growth durability and the company’s planned use of excess cash for securities and loans, alongside liquidity and dividend capacity.
- The status of the 100-basis-point-down interest-rate-sensitivity exception, pending litigation, and any tax-law changes.