Farmers National Banc Corp. (NASDAQ: FMNB) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial amounts below are in U.S. dollars; monetary figures are rounded to millions unless stated otherwise. The company provides banking, trust, insurance and related financial services, primarily in northeastern Ohio and western Pennsylvania.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $33.8m | $31.8m | $105.0m | $94.7m |
| Net interest margin | 2.86% | 3.21% | 2.95% | 3.24% |
| Net income | $13.3m | $15.4m | $35.4m | $47.2m |
| Diluted earnings per share | $0.36 | $0.46 | $0.94 | $1.39 |
| Provision for credit losses and unfunded loans | $0.2m | $0.4m | $8.9m | $0.7m |
| Noninterest income | $9.8m | $8.8m | $29.7m | $36.0m |
| Noninterest expense | $27.7m | $21.4m | $84.8m | $73.3m |
- Quarterly net income fell about 14% year over year; nine-month net income fell about 25%. Higher funding costs compressed margins, while the Emclaire acquisition expanded the balance sheet and contributed to revenue and expense growth.
- Average interest-earning asset yield rose to 4.56% in Q3 from 3.67% a year earlier, but the cost of interest-bearing liabilities rose to 2.30% from 0.65%. Management attributed the margin pressure to deposit competition, Federal Reserve rate increases and the use of more costly wholesale funding.
- Nine-month operating cash flow was $48.5m, versus $59.2m in 2022. Investing activities provided $96.5m, compared with $250.7m used in 2022; financing activities used $126.5m, compared with $158.7m provided. Cash and cash equivalents ended the period at $93.9m, up $18.4m from year-end 2022.
Financial position, liquidity and capital
- Total assets were $4.97bn, up from $4.08bn at December 31, 2022. Gross loans were $3.17bn, compared with $2.40bn at year-end; the company attributed most of the increase to acquired Emclaire loans.
- Deposits totaled $4.51bn, up from $3.56bn. The increase primarily reflected $875.8m of deposits assumed in the acquisition and a $116.2m increase in brokered deposits; customer deposits declined $42.1m. Loans were 70.23% of deposits.
- Cash and cash equivalents were $93.9m. Short-term borrowings were zero, down from $95.0m of FHLB advances at year-end. Long-term borrowings were $88.6m, including subordinated debt. The Bank reported $892.6m of additional FHLB borrowing capacity, an unused $25m bank line and access to the Federal Reserve Discount Window.
- Stockholders’ equity was $316.0m, or 6.36% of assets. Regulatory capital ratios included a 10.37% consolidated common equity tier 1 ratio, 13.83% consolidated total risk-based capital ratio and 7.84% consolidated tier 1 leverage ratio. The Bank was categorized as well capitalized.
Material changes and notable items
- The Emclaire/ Emlenton acquisition closed January 1, 2023, expanding the company into Pennsylvania and the Pittsburgh market. Consideration was approximately $92.6m ($33.4m cash and $59.2m stock); the company recorded $73.4m of goodwill. Acquisition accounting and the larger acquired business affect comparisons with 2022.
- Nine-month results included $5.0m of merger costs and $7.7m of Day 1 credit-loss and unfunded-commitment provisions associated with the acquisition. Management said the acquisition-related Day 1 provision accounted for most of the year-over-year increase in provision expense.
- Available-for-sale securities had fair value of $1.21bn against amortized cost of $1.53bn, with $320.4m of gross unrealized losses. Accumulated other comprehensive loss was $252.2m at quarter-end. Management attributed securities losses to interest rates and market conditions rather than credit deterioration, reported no securities credit-loss allowance, and said it had the ability and intent to hold the securities long enough to allow for recovery.
- The company sold $85.3m of available-for-sale securities during the first nine months. Q3 security losses were $624,000; management said sales were intended to improve future net interest margin.
- The allowance for credit losses was $34.8m, or 1.10% of loans, versus $27.0m and 1.12% at year-end 2022. Nonperforming loans were $18.4m (0.58% of loans), compared with $14.8m (0.62%) at year-end; 30–89-day delinquencies were 0.42% of loans. Management considered the allowance adequate and expected minimal economic change, stable unemployment and level delinquencies in its credit-loss assumptions.
- Cash dividends were $0.17 per share in each of the first three quarters. The company repurchased 850,799 shares during Q1 2023; there were no purchases under the public program in Q3, and 497,047 shares remained authorized for repurchase at September 30.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management identified elevated funding costs and margin compression as ongoing earnings headwinds. It described prioritizing loan growth and shrinking the securities portfolio as measures to address interest-rate exposure.
- Interest-rate simulations show material exposure in rising-rate scenarios: at September 30, a sustained +400-basis-point shock projected a 9.8% decline in net interest income and a 38.5% decline in the economic value of equity; a +300-basis-point shock projected a 29.0% decline in economic value of equity. The latter measure exceeded internal policy limits in the rising-rate scenarios discussed by management.
- Other stated risks include economic and credit conditions, interest-rate and inflation changes, deposit competition and funding availability, banking-industry developments and regulation, technology and competition, and the ability to attract and retain employees. The company specifically noted potential effects on confidence, liquidity, funding, regulatory costs and reputation from recent bank failures.
- Unused loan commitments totaled $808.2m at September 30; the company also reported $756m of unfunded commitments for its credit-loss-reserve calculation and a related $2.04m reserve. It had up to $19.7m of commitments to SBIC funds, of which $16.4m had been invested.
- The company is a defendant in an ordinary-course lawsuit concerning certain nonsufficient-funds fees. It reached a tentative settlement of up to $785,000, subject to court approval and other conditions. The filing says legal matters could be material to results in a particular future period if resolved unfavorably.
- Noninterest income for the first nine months of 2022 included an $8.4m legal settlement that did not recur. 2022 also included a $6.0m charitable contribution and $2.1m in legal costs associated with that settlement. In 2023, the company recognized $785,000 of expense related to settlement of a lawsuit.
Most important facts for investors to verify
- How quickly deposit costs and funding mix stabilize, and whether net interest margin can recover without materially weakening deposit retention.
- The trajectory of Emclaire integration, merger-related costs, acquired-asset performance and any changes to preliminary acquisition fair-value estimates.
- Whether unrealized securities losses and the reported rising-rate economic-value-of-equity sensitivity affect liquidity, capital or the company’s ability to hold securities.
- Credit quality trends, including nonperforming loans, delinquencies, criticized commercial real estate exposures, charge-offs and the adequacy of the allowance.
- The final approval and cost of the NSF-fee settlement, and any material developments in other legal proceedings.