Farmers National Banc Corp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; income and cash flows are compared with Q1 2019. Balance-sheet comparisons are primarily with December 31, 2019. The company provides banking, trust, retirement consulting, and insurance services in northeastern Ohio and western Pennsylvania. Unless noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / December 31, 2019 |
|---|---|---|
| Interest and dividend income | $27.7 | $24.7 in Q1 2019 |
| Net interest income | $22.3 | $20.0 in Q1 2019 |
| Net interest margin, tax-equivalent | 3.75% | 3.81% in Q1 2019 |
| Noninterest income | $7.7 | $6.5 in Q1 2019 |
| Noninterest expenses | $18.6 | $16.0 in Q1 2019 |
| Provision for loan losses | $1.1 | $0.55 in Q1 2019 |
| Net income / diluted EPS | $8.6 / $0.30 | $8.4 / $0.30 in Q1 2019 |
| Total assets | $2,668.2 | $2,449.2 |
| Loans / deposits | $1,976.6 / $2,246.3 | $1,811.5 / $2,009.0 |
| Cash and cash equivalents | $83.1 | $70.8 |
| Total borrowings | $96.9 | $122.2 |
| Stockholders’ equity | $303.6 | $299.3 |
Net cash from operating activities was $5.8 million versus $5.2 million in Q1 2019. Investing activities provided $3.2 million, including $8.1 million net cash paid for the Maple Leaf acquisition; financing activities provided $3.3 million. Cash increased $12.3 million during the quarter.
The consolidated common equity tier 1, total risk-based capital, tier 1 risk-based capital, and tier 1 leverage ratios were 12.26%, 13.43%, 12.70%, and 10.18%, respectively. Management said the company and bank met applicable capital requirements. The bank reported $492.4 million of additional FHLB borrowing capacity; liquidity also included bank lines and Federal Reserve access.
Material changes and notable items
- Net interest income rose 11.7% year over year, reflecting loan growth, including acquired loans. The tax-equivalent net interest margin declined six basis points as earning-asset yields fell more than the cost of interest-bearing liabilities.
- Noninterest income increased 18.3%, led by mortgage loan sale gains, up $695,000, as well as higher insurance and investment commissions. Noninterest expenses rose 16.3%, including $1.3 million of merger-related costs, higher salaries, and FDIC insurance expense.
- Reported efficiency ratio increased to 59.7% from 57.8%; excluding acquisition costs, management reported 55.4%. Net income excluding acquisition costs was $9.7 million, or $0.34 per diluted share, a non-GAAP measure.
- Maple Leaf Financial was acquired January 7, 2020 for approximately $43.0 million in cash and stock. The transaction added $183.3 million of deposits and $181.3 million of loans at acquisition-date fair value and created $9.2 million of goodwill. Total loans grew $165.0 million from year-end; management attributed the increase to the acquisition and organic growth.
- Other comprehensive income included a $9.9 million after-tax loss, largely from lower fair values of available-for-sale securities during market volatility. Management considered the debt-security losses temporary and reported no other-than-temporary impairment.
- The company repurchased 942,967 shares during the quarter for $14.2 million; the repurchase program was suspended in March. The first-quarter dividend was $0.11 per share. Book value per share was $10.79, down from $10.82 at year-end.
Outlook, risks, and contingencies
- Management provided no quantified earnings or margin guidance and said the duration and financial impact of COVID-19 remained uncertain. It warned that fee waivers, borrower payment deferrals, credit losses, lower activity, funding-cost volatility, and business-continuity disruptions could affect future results, capital, liquidity, and cash flows.
- Through March 31, the company had processed about 168 consumer payment-deferral requests totaling $8.3 million and 170 business requests totaling $89.1 million. By April 24, it had facilitated PPP assistance for 726 businesses totaling approximately $145.6 million.
- Credit indicators weakened: nonperforming loans were $11.8 million, or 0.60% of loans, versus 0.43% a year earlier; loans 30–89 days delinquent were $19.1 million, or 0.97%, versus 0.52%. Net charge-offs were $635,000, compared with $365,000 a year earlier. The allowance was $15.0 million, equal to 0.76% of loans and 126.23% of nonperforming loans.
- The bank postponed CECL adoption under CARES Act relief. Management estimated that adoption as of January 1, 2020, excluding potential COVID-19 effects, would have increased the year-end allowance by 15%–20%.
- Management cited less than 4.1% of loans in specified vulnerable industries (restaurants, transportation, arts/entertainment, hotels, and oil and gas). It also noted that the modeled 100-basis-point rate decline breached the company’s net-present-value-of-equity policy limit; management said it would continue monitoring the exposure.
- The company had ordinary-course legal proceedings. A $505,000 charge was accrued in 2019 for a pending settlement; management expected insurance recovery, but no recovery asset had been recorded by March 31, 2020. Management stated that an unfavorable resolution of other matters could materially affect a future period.
Important facts for investors to verify
- Whether COVID-related payment deferrals convert into delinquencies, losses, or reversals of accrued interest, and whether the allowance remains adequate as economic forecasts develop.
- Subsequent trends in nonperforming loans, early delinquencies, charge-offs, and allowance coverage, including acquired Maple Leaf loans.
- Deposit composition, brokered funding, borrowing costs, FHLB capacity, and liquidity needs if customers withdraw funds or funding markets become more expensive.
- Whether Maple Leaf integration delivers expected synergies and whether merger costs, goodwill, or acquired-asset valuations require further adjustment.
- The effect of securities-market changes, low interest rates, and the disclosed rate-shock policy exception on net interest margin, capital, and tangible book value.
- Progress and ultimate costs or recovery related to the accrued legal matter; reported expected insurance proceeds had not been recognized.