Farmers National Banc Corp. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This annual filing includes fourth-quarter data but is not a standalone Q4 report. Farmers is an Ohio-based financial holding company operating principally through its community bank and trust businesses.
Financial results and position
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net income | $51.8 million | $41.9 million |
| Diluted EPS | $1.77 | $1.47 |
| Net interest income | $108.0 million | $96.2 million |
| Tax-equivalent net interest margin | 3.45% | 3.70% |
| Noninterest income | $38.2 million | $36.2 million |
| Noninterest expense | $79.2 million | $73.0 million |
| Provision for credit losses | $4.6 million | $9.2 million |
Total assets were $4.14 billion at year-end, up from $3.07 billion. Loans were $2.33 billion, deposits $3.55 billion, and stockholders’ equity $472.4 million. The allowance for credit losses was $29.4 million, or 1.26% of loans. Nonperforming loans were $16.2 million (0.69% of loans), versus $13.8 million (0.67%) a year earlier.
Net cash from operating activities was $54.9 million; investing activities used $423.6 million, largely reflecting securities purchases; financing activities provided $226.8 million. Cash and cash equivalents declined by $141.8 million to $112.8 million. Management reported total on-hand liquidity of $1.6 billion, including cash, unencumbered securities and additional FHLB borrowing capacity. Long-term borrowings totaled $87.8 million; there were no short-term borrowings at year-end.
Changes versus the prior year
- Net income increased 23.8%, while diluted EPS rose from $1.47 to $1.77. FY 2021 included only two months of Cortland operations, along with acquisition costs and purchase-accounting effects.
- Net interest income grew as interest expense fell to $8.5 million from $16.1 million. However, net interest margin contracted 25 basis points, as low rates weighed more heavily on asset yields and the portfolio held more lower-yielding securities.
- Deposits increased $936.4 million, including $695.3 million acquired with Cortland. Loans increased 12.2% reported, but declined 11.0% excluding Cortland, reflecting PPP loan forgiveness and payoffs, customer liquidity and refinancing activity.
- Investment securities rose to $1.43 billion from $575.6 million, as excess cash and deposit inflows were invested. Noninterest expense increased 8.5%, including $7.1 million of merger-related costs.
- Net charge-offs declined to $862,000 from $1.4 million. The allowance ratio rose from 1.07% to 1.26%, reflecting CECL adoption, Cortland purchase accounting and the larger loan portfolio.
Outlook, risks and unusual items
- Cortland acquisition: Completed November 1, 2021 for approximately $128.5 million in cash and stock consideration. It added $482.2 million of loans and $695.3 million of deposits; Farmers recorded $48.5 million of goodwill and $7.1 million of merger-related costs. Management cited potential cost savings and expanded market presence, while warning that integration and expected synergies are uncertain.
- Fourth quarter: Net income was $5.7 million and diluted EPS was $0.18, compared with $11.4 million and $0.40 in Q4 2020. Q4 2021 included $6.5 million of merger-related costs and a $5.4 million provision for credit losses.
- Capital and debt: Farmers issued $75 million of subordinated notes in November, with a 3.125% fixed rate for five years followed by a floating rate. It also prepaid $65 million of FHLB advances, incurring $2.1 million in penalties. The Bank was reported well capitalized; its total risk-based capital ratio was 13.62%.
- Credit and concentration risk: Real estate loans represented about 75.9% of the loan portfolio, and most business activity is concentrated in Northeast Ohio. Management cited economic, collateral-value and borrower repayment uncertainty. PPP loans remain subject to possible SBA guarantee disputes; the company reported $607 million in unfunded commitments.
- Liquidity and rate exposure: Core deposits were approximately 96.1% of deposits, but $1.16 billion of deposits exceeded FDIC insurance limits. The interest-rate simulation showed a 4.1% decrease in net interest income and a 12.4% decrease in net present value of equity under a 100-basis-point rate decline; the latter exceeded internal policy limits. Management said it would continue monitoring the exception.
- Accounting, controls and contingencies: CECL adoption on January 1, 2021 resulted in a $1.9 million after-tax reduction to equity. The auditor identified the loan-loss allowance and Cortland purchase accounting as critical audit matters, while issuing unqualified opinions on the financial statements and internal controls. Cortland’s operations were excluded from the internal-control assessment under the permitted acquisition exclusion. Management said pending legal matters were not expected to have a material adverse effect, though an unfavorable resolution could be material in a future period.
- Forward outlook: The filing provides no specific FY 2022 earnings or revenue guidance. Management emphasized sensitivity to interest rates, local economic and credit conditions, competition, regulation, technology and COVID-19 developments.
Important facts for investors to verify
- Whether Cortland integration delivers the anticipated cost savings and revenue opportunities, and how acquisition-related expenses evolve.
- Whether margin pressure persists as asset yields, deposit costs and the expanded securities portfolio respond to changing interest rates.
- Trends in nonperforming loans, real-estate concentrations, charge-offs and the adequacy of the CECL allowance.
- The stability and composition of deposits, including uninsured balances, and the availability of liquidity under stressed conditions.
- Management’s response to the modeled rate-decline policy exception and the associated effect on earnings and equity value.
- How acquired operations are incorporated into internal-control testing, and whether subsequent filings report material integration or control issues.