Farmers National Banc Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results. Amounts are in millions of dollars unless stated otherwise.
Business context
Farmers National Banc Corp. provides banking, trust, retirement consulting and insurance services, primarily in northeastern Ohio and western Pennsylvania. Its reportable segments are Bank and Trust. The January 7, 2020 acquisition of Maple Leaf Financial, parent of Geauga Savings Bank, expanded the company’s presence in Ohio and contributed to balance-sheet growth.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net interest income | $24.2 | $20.8 | +16.4% |
| Provision for loan losses | $2.6 | $0.6 | Higher by $2.1 |
| Noninterest income | $9.5 | $7.6 | +25.0% |
| Noninterest expense | $17.7 | $16.6 | +7.0% |
| Net income | $10.9 | $9.2 | +18.7% |
| Diluted EPS | $0.38 | $0.33 | +$0.05 |
For the first nine months, net income was $30.5 million versus $26.1 million, and diluted EPS was $1.07 versus $0.94. Net interest margin was 3.59% for Q3, down 20 basis points year over year, and 3.69% for the nine-month period, down 12 basis points. Q3 margin excluding PPP loan interest and fees was 3.69%. Q3 efficiency ratio improved to 50.66% from 55.90%; annualized return on average assets was 1.46% and return on average equity was 12.87%.
Mortgage loan sale gains drove much of the increase in noninterest income, rising $2.2 million year over year as lower rates supported refinancing and home purchases. Deposit service-charge income fell $304,000, partly reflecting COVID-related customer behavior and fee relief. Q3 expense increases included salaries and benefits, FDIC insurance, occupancy and state and local taxes.
Balance sheet, cash flow and capital
| Metric | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $2,989.2 | $2,449.2 |
| Gross loans | $2,147.2 | $1,811.5 |
| Allowance for loan losses | $19.3 | $14.5 |
| Total deposits | $2,538.3 | $2,009.0 |
| Total borrowings | $81.7 | $122.2 |
| Stockholders’ equity | $340.0 | $299.3 |
| Cash and cash equivalents | $199.6 | $70.8 |
Loan growth included $199.8 million of PPP loans and loans acquired with Maple Leaf. Deposits increased $529.4 million, including $183.3 million from the acquisition; management also cited public funds and PPP proceeds deposited by business customers. Borrowings declined mainly because the company repaid short-term FHLB advances, while long-term borrowings increased. The company reported $67.2 million in long-term FHLB advances and approximately $553.7 million of additional FHLB borrowing capacity.
For the first nine months, operating cash flow was $26.7 million, investing cash flow was negative $171.8 million and financing cash flow was positive $273.9 million. The resulting net increase in cash and cash equivalents was $128.8 million. Management expected cash to decline toward year-end 2019 levels over the following months as funds supported loan growth and securities purchases.
The company’s common equity tier 1, total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 12.98%, 14.36%, 13.43% and 9.67%, respectively. The Bank was classified as well capitalized under prompt-corrective-action rules. The quarterly dividend was $0.11 per share; the share repurchase program was suspended during the first nine months.
Material changes, outlook and risks
- Acquisition: Maple Leaf was acquired for approximately $43.0 million in cash and stock. The transaction added $9.2 million of goodwill; the acquired company had $183.3 million of deposits at closing. Merger-related costs were $1.4 million for the first nine months of 2020.
- Credit and COVID-19: The allowance rose to $19.3 million, or 0.90% of loans, from $14.5 million at year-end. The nine-month provision increased to $6.1 million from $1.9 million. Nonperforming loans were 0.55% of loans; nonperforming assets were 0.40% of assets. Management considered the allowance adequate but warned that pandemic-related credit deterioration could increase losses.
- Customer relief and PPP: At September 30, five loans totaling $848,000 remained under payment deferral, compared with 338 loans totaling $97.5 million at March 31. The company facilitated $199.8 million of PPP loans for 1,714 business customers. By October 22, SBA forgiveness payments had been received for $1.8 million, approximately 1% of total PPP loans. COVID-related fee waivers totaled $780,000 for the first nine months.
- Exposures and credit accounting: Loans to restaurants and catering, hotels, golf courses and energy totaled $100.1 million, or 4.67% of loans. The Bank postponed CECL adoption under CARES Act relief; management estimated adoption as of January 1, 2020 would have increased the allowance by 15%–20%, excluding potential pandemic effects.
- Interest-rate risk: Management described the balance sheet as slightly asset sensitive, with low rates potentially pressuring margin. Its modeled 100-basis-point rate decline reduced net interest income by 1.8% and net present value of equity by 21.1%; the latter exceeded the company’s policy limit. Management said it would continue monitoring the exception.
- Uncertainty: The filing provides no specific earnings or margin guidance. Management cited uncertainty around the pandemic, customer repayment capacity, future credit losses, deposit withdrawals, funding costs, interest rates, regulation and the availability of further federal stimulus. It also noted that continued fee waivers and deferred payments could affect future income and credit quality.
Important facts for investors to verify
- Whether PPP forgiveness proceeds and fee recognition occur as anticipated, and how much of the $199.8 million PPP portfolio remains outstanding.
- Whether deferrals ending or renewed pandemic disruption lead to higher delinquencies, nonaccrual loans, charge-offs or allowance needs.
- How Maple Leaf integration, goodwill and merger costs affect expenses and earnings over subsequent periods.
- Whether the reported improvement in mortgage-related income persists as refinancing activity and interest rates change.
- How the company addresses the modeled interest-rate policy exception and whether low rates further compress net interest margin.
- Whether cash levels, deposit composition, borrowing capacity and capital remain sufficient under adverse economic conditions.