Farmers National Banc Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Farmers National Banc Corp. is an Ohio-based financial holding company providing banking, trust, investment and insurance services, primarily in northeastern Ohio and western Pennsylvania. Unless noted otherwise, dollar figures below are in millions.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $26.5 | $23.9 | $51.8 | $46.2 |
| Provision for credit losses | $0.05 | $2.4 | $0.48 | $3.5 |
| Noninterest income | $9.9 | $9.1 | $20.5 | $17.0 |
| Noninterest expense | $17.4 | $17.7 | $35.2 | $36.5 |
| Net income | $15.6 | $11.0 | $30.1 | $19.7 |
| Diluted EPS | $0.55 | $0.39 | $1.06 | $0.69 |
| Net interest margin, tax-equivalent | 3.54% | 3.74% | 3.56% | 3.74% |
- Q2 return on average assets was 1.90% and return on average equity was 17.17%; the efficiency ratio improved to 46.1% from 50.8%.
- At June 30, total assets were $3.26 billion, up from $3.07 billion at December 31, 2020. Cash and cash equivalents were $149.4 million, down from $254.6 million, while available-for-sale securities rose to $996.3 million from $575.6 million.
- Gross loans were $1.96 billion, down from $2.08 billion at year-end; deposits were $2.78 billion, up from $2.61 billion. The loan-to-deposit ratio was 70.53%. Core deposits represented approximately 95.15% of deposits.
- Stockholders’ equity was $366.9 million. The Bank was categorized as well capitalized; consolidated common equity tier 1, total risk-based capital and leverage ratios were 13.95%, 15.54% and 9.70%, respectively.
- Borrowings totaled approximately $78.4 million, including $65.0 million of long-term FHLB advances and $9.5 million of trust preferred debentures. The Bank reported $532.9 million of additional FHLB borrowing capacity.
- Six-month operating cash flow was $23.4 million; investing cash outflow was $289.6 million, primarily reflecting $469.3 million of securities purchases; financing cash inflow was $160.9 million. Cash declined by $105.3 million over the period.
Material changes versus comparable periods
- Q2 net income increased 41% year over year, supported by higher net interest income, stronger fee income and a much lower credit-loss provision. The six-month increase also reflected lower expenses, including a $1.3 million reduction in merger-related costs.
- Net interest margin fell 20 basis points in Q2 and 18 basis points for the first half. Management attributed the pressure to lower asset yields; the decline in funding costs partly offset it.
- Fee income benefited from trust fees, insurance commissions, debit-card fees and other operating income. Q2 gains on mortgage loan sales fell $1.2 million as refinancing slowed.
- Loan balances declined mainly from PPP forgiveness, subdued lending and competition. PPP loans outstanding, net of deferred fees, fell to $92.1 million from $128.1 million at December 31, 2020.
- On January 1, 2021, the company adopted CECL, recording a $1.9 million after-tax reduction to retained earnings and a $2.5 million increase in the allowance. The allowance was $24.8 million, or 1.27% of loans, at June 30.
- Unrealized losses on available-for-sale securities contributed to a $5.2 million after-tax decline in other comprehensive income for the first half; the company attributed the losses to noncredit factors and recorded no securities credit-loss allowance.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal earnings or operating guidance. Management expects cash to decline further as excess funds are invested in securities and, to a lesser extent, loans. It cautions that low interest rates could further pressure margin and that future COVID-19 effects on borrowers and fee income remain uncertain.
- Cortland transaction: On June 22, 2021, Farmers agreed to acquire Cortland Bancorp. Cortland shareholders may elect $28 per share in cash or 1.75 Farmers shares, subject to an overall 75% stock/25% cash allocation. The transaction required shareholder and regulatory approvals and was expected to close in Q4 2021. Cortland reported $793.0 million of assets, $492.0 million of gross loans and $677.6 million of deposits at June 30.
- Credit and COVID-19: Nonperforming assets were 0.43% of assets; nonperforming loans were 0.71% of loans, up from 0.57% a year earlier. Early-stage delinquencies were 0.39% of loans. Two loans totaling $8.7 million remained on payment deferral at June 30. Loans to identified vulnerable industries were $88.1 million, or 4.65% of total loans. The company had waived $780,000 in customer fees since the pandemic began.
- PPP: Farmers facilitated $199.8 million of 2020 PPP loans and processed $83.9 million of new PPP loans in the first half of 2021. SBA forgiveness payments received to date were $181.6 million for 2020 loans and $5.2 million for 2021 loans.
- Liquidity and rate risk: Management considered liquidity adequate and reported an unused $35 million line of credit, additional correspondent-bank facilities and access to the Federal Reserve Discount Window. The company is slightly asset-sensitive, but its modeled net present value of equity fell 16% under a 100-basis-point rate decrease, exceeding its internal policy limit; management said it would continue monitoring the exception.
- Other risks and contingencies: The filing cites pandemic-related credit and operating risks, competition, regulation, interest-rate changes and potential tax-law changes, including a proposed increase in the federal corporate tax rate. The company is involved in ordinary-course litigation; an unfavorable resolution could materially affect a future period, though timing and amount are unknown.
Important facts for investors to verify
- Whether the Cortland merger received required approvals, closed as anticipated, and delivered expected scale or synergies.
- Subsequent trends in nonperforming loans, delinquencies, charge-offs, deferred loans and allowance adequacy under CECL.
- Whether margin pressure persists, particularly given low rates, the large securities portfolio and the disclosed downside rate sensitivity.
- How PPP forgiveness, loan demand and deposit balances affect future earning-asset mix, liquidity and profitability.
- The effects of the large increase in available-for-sale securities, including interest-rate exposure and changes in accumulated other comprehensive income.