Business context and reporting period
Farmers National Banc Corp. (NASDAQ: FMNB) is a financial holding company serving northeastern Ohio and western Pennsylvania through banking, trust, insurance and investment businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $31.7 | $26.5 | $63.0 | $51.8 |
| Noninterest income | $9.5 | $9.5 | $27.2 | $19.6 |
| Net income | $16.0 | $15.6 | $31.8 | $30.1 |
| Diluted EPS | $0.47 | $0.55 | $0.94 | $1.06 |
| Net interest margin | 3.25% | 3.52% | 3.25% | 3.53% |
- Balance sheet: Total assets were $4.11 billion, versus $4.14 billion at year-end. Loans were $2.37 billion, up $43.4 million from year-end; deposits were $3.63 billion, up $78.3 million.
- Liquidity and funding: Cash and cash equivalents were $65.5 million, down from $112.8 million. Farmers had $50 million of short-term FHLB advances and $88.0 million of long-term borrowings. It reported $645.2 million of additional FHLB borrowing capacity, plus unused bank credit lines.
- Cash flow: For the first half, operating activities provided $40.2 million, investing activities used $205.0 million, and financing activities provided $117.5 million. Cash decreased $47.3 million.
- Asset quality: Nonperforming loans were $14.1 million, or 0.59% of loans; nonperforming assets were 0.34% of assets. The allowance for credit losses was $27.5 million, or 1.16% of loans. Q2 net charge-offs were $42,000.
- Capital and equity: Stockholders’ equity declined 32.0% from year-end to $321.4 million, primarily reflecting a $172.1 million after-tax decline in accumulated other comprehensive income (AOCI) and dividends, partly offset by earnings. The company reported a 13.30% consolidated common equity tier 1 ratio and a 17.46% total risk-based capital ratio; the Bank remained categorized as well capitalized.
Material changes versus comparable periods
- Quarterly net income increased modestly, but diluted EPS declined as the Cortland acquisition increased the share count and PPP income and loan-sale gains fell. H1 net income also rose, while diluted EPS declined.
- Net interest income grew with a larger earning-asset base, including Cortland. However, net interest margin fell 27 basis points in Q2 and 28 basis points for the half year. Management cited lower PPP income and a greater share of earning assets invested in securities rather than loans.
- Q2 loan-sale gains fell to $0.4 million from $2.2 million, which management attributed to lower production, compressed margins and a lower saleable loan mix amid rising rates.
- H1 noninterest income included an $8.4 million legal settlement recorded in Q1. H1 noninterest expense included a $6.0 million charitable contribution and legal costs associated with the settlement; Q2 expenses also reflected Cortland-related costs and higher employee benefit costs.
- Rising Treasury rates drove the AFS securities portfolio from a gross unrealized gain at year-end to a gross unrealized loss of approximately $206 million at June 30. Management attributed the losses to market factors, not credit deterioration, and recorded no AFS securities credit-loss allowance.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management said it considers liquidity adequate and will continue to monitor it. Interim results are not necessarily indicative of full-year results.
- The planned Emclaire Financial acquisition had shareholder approval but remained subject to regulatory approvals; closing was expected in the second half of 2022. Emclaire reported $1.0 billion of assets, $810.7 million of gross loans and $937.6 million of deposits as of June 30.
- Management identified interest-rate changes, economic conditions and credit quality, loan demand, competition, regulation, technology changes, and pandemic-related effects among factors that could cause actual results to differ from forward-looking statements.
- A class-action lawsuit alleges improper multiple non-sufficient-funds fees. The court denied the company’s motion to dismiss on July 22, 2022; the company intends to defend the case and said it could not determine whether an adverse outcome was reasonably possible or estimate a potential loss.
- Interest-rate sensitivity modeling showed estimated net interest income up 2.4% under a +300-basis-point shock and down 4.5% under a -100-basis-point shock. Estimated net present value of equity changed +0.2% and -7.2%, respectively. Management said June results were within internal limits.
Investor verification priorities
- Verify the size, duration and potential capital impact of AFS unrealized losses, and the sensitivity of equity and earnings to further interest-rate moves.
- Track deposit composition and pricing, brokered deposits, FHLB borrowing, liquidity capacity and the effect of rising funding costs on net interest margin.
- Assess loan growth, delinquency and nonperforming-loan trends, charge-offs, and the adequacy of the allowance, particularly as economic conditions change.
- Separate recurring earnings from the $8.4 million settlement and associated legal expense, the $6.0 million charitable contribution, merger costs and declining PPP and loan-sale income.
- Confirm regulatory approval and closing terms for the Emclaire transaction, and monitor integration costs and any resulting share dilution.
- Follow developments in the NSF-fee lawsuit; the filing does not provide a clear estimate of potential loss.