Farmers National Banc Corp. (NASDAQ: FMNB) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Financial statement amounts below are in millions of dollars unless otherwise noted. The company provides banking, trust, insurance and related services, principally in northeastern Ohio and western Pennsylvania.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Interest and dividend income | $55.1 | $51.2 |
| Net interest income | $31.7 | $36.6 |
| Net interest margin | 2.70% | 3.07% |
| Noninterest income | $8.4 | $10.4 |
| Noninterest expense | $27.0 | $30.7 |
| Net income | $11.2 | $7.1 |
| Diluted EPS | $0.30 | $0.19 |
| Operating cash flow | $13.2 | $13.9 |
Net income increased approximately 59% year over year. However, the comparison reflects $4.3 million of merger costs and a $7.7 million acquisition-related day-one credit provision in Q1 2023; neither was recorded in Q1 2024. Reported net interest income fell about 13%, as higher funding costs more than offset increased earning-asset yields. Interest-bearing liability costs rose 97 basis points year over year, versus a 38-basis-point increase in earning-asset yields. The filing reports no formal earnings guidance.
Financial position, liquidity and credit
- Assets and loans: Total assets were $5.08 billion at March 31, 2024, essentially unchanged from year-end 2023. Loans were $3.18 billion before the allowance, down from $3.20 billion; net loans were $3.15 billion.
- Deposits and borrowings: Deposits increased $20.7 million from year-end to $4.20 billion. Short-term borrowings declined $10.0 million to $345.0 million; long-term borrowings were $88.8 million. Cash and cash equivalents rose $45.0 million to $148.6 million.
- Liquidity access: The Bank reported $739.9 million of additional FHLB borrowing capacity, a $25 million bank line and access to the Federal Reserve Discount Window. Management considered liquidity adequate. The $285 million short-term borrowing balance includes a borrowing maturing in January 2025, secured by securities.
- Credit quality: The allowance for credit losses was $33.2 million, or 1.04% of loans, versus $34.4 million, or 1.08%, at year-end. Nonperforming loans were $12.0 million (0.38% of loans), down from $15.1 million at year-end. Q1 net charge-offs were $1.0 million; the allowance was 277% of nonperforming loans.
- Capital and equity: Stockholders’ equity was $397.0 million, down from $404.4 million. Consolidated CET1, total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios were 10.88%, 14.38%, 11.37% and 8.19%, respectively. The Bank was categorized as well capitalized.
- Cash flows: Investing activities provided $27.4 million and financing activities provided $4.4 million; cash increased $45.0 million during the quarter.
Material changes and unusual items
- Net interest margin compressed to 2.70% from 3.07%, which management attributed mainly to deposit-rate competition, higher funding costs and greater use of wholesale funding.
- Noninterest income declined to $8.4 million, primarily reflecting a $2.1 million securities loss. The company sold approximately $44.3 million of securities in a portfolio restructure and reinvested the proceeds in securities with yields about 200 basis points higher than those sold.
- Q1 2024 included a $449,000 credit for credit losses and unfunded commitments, compared with an $8.6 million provision in Q1 2023. The prior-year amount included the $7.7 million acquisition-related day-one provision.
- Available-for-sale securities had approximately $234.2 million of net unrealized losses at March 31. Management attributed the losses to interest rates and market conditions, not credit deterioration, and stated it had the ability and intent to hold the securities long enough for recovery.
- Accumulated other comprehensive loss worsened by $12.4 million during the quarter, contributing to the decline in stockholders’ equity. The quarterly dividend was $0.17 per share.
Outlook, risks and contingencies
Management cited soft loan demand and loan paydowns, while expecting minimal changes in its operating markets’ economic conditions, stable unemployment and a level trend in delinquencies for its credit-loss assumptions. These are assumptions, not earnings guidance. Key stated risks include economic and credit conditions, interest-rate and inflation changes, deposit competition and funding availability, regulatory developments, banking-industry confidence, technology and competition.
Interest-rate simulations show that a sudden, sustained 400-basis-point increase could reduce net interest income by 7.3% and economic value of equity by 36.8%. The latter exceeds the company’s internal guideline. Management said it is prioritizing loan growth, shrinking the securities portfolio and using short-term wholesale funding to address rate and funding risks. The company is also a defendant in ordinary-course legal proceedings; the filing says an unfavorable resolution could be material in a particular future period, but does not provide a clear estimate of exposure.
Important facts for investors to verify
- Whether deposit costs and wholesale funding continue to pressure net interest margin, and how the January 2025 borrowing maturity will be funded.
- Changes in loan demand, delinquencies, nonperforming loans, charge-offs and the adequacy of the credit-loss allowance.
- Progress and realized yields from the securities restructure, and the effect of unrealized securities losses on capital and equity.
- Interest-rate sensitivity and management’s response to the reported economic-value-of-equity guideline breach under rising-rate scenarios.
- Any material developments in legal proceedings, deposit trends or access to contingent liquidity sources.