Farmers National Banc Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts below are in millions unless stated otherwise. Farmers is a regional financial holding company operating primarily in northeastern Ohio and western Pennsylvania, with banking and trust businesses.
Financial results and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $31.8 | $26.5 | $94.7 | $78.3 |
| Noninterest income | $8.8 | $9.0 | $36.0 | $28.7 |
| Noninterest expense | $21.4 | $17.1 | $73.3 | $51.5 |
| Net income | $15.4 | $16.0 | $47.2 | $46.1 |
| Diluted EPS | $0.46 | $0.56 | $1.39 | $1.63 |
| Net interest margin | 3.21% | 3.49% | 3.24% | 3.49% |
- Q3 net income declined about 3.5% year over year; nine-month net income increased about 2.4%. Lower diluted EPS comparisons reflect, in part, the higher share count following the Cortland acquisition.
- Q3 annualized return on average assets was 1.48% and return on average equity was 18.71%; for the nine-month period, they were 1.51% and 16.55%, respectively.
- At September 30, total assets were $4.12 billion; gross loans were $2.40 billion and net loans were $2.37 billion. Deposits were $3.57 billion. Total stockholders’ equity was $265.6 million.
- Cash and cash equivalents were $80.0 million, down $32.8 million from year-end 2021. Nine-month operating cash flow was $62.1 million, investing cash flow was negative $253.6 million, and financing cash flow was positive $158.7 million.
- Total borrowings were approximately $243.1 million, including $155 million in short-term FHLB advances and $88.1 million in long-term borrowings. The Bank reported $550.8 million of additional FHLB borrowing capacity and unused bank credit lines.
- Regulatory capital ratios remained above stated minimums: consolidated common equity tier 1 was 13.36%, total risk-based capital 17.44%, tier 1 risk-based capital 13.97%, and tier 1 leverage 10.24%. The Bank was categorized as well capitalized.
Material changes versus comparable periods
- Q3 net interest income grew 19.8%, primarily reflecting a larger earning-asset base, including Cortland. Margin nevertheless fell 28 basis points year over year: the filing cites reduced PPP income and a greater share of earning assets invested in securities rather than loans.
- Interest expense rose as deposit and borrowing costs increased. For Q3, the cost of interest-bearing liabilities rose 32 basis points year over year, while asset yields decreased 6 basis points.
- Noninterest income was slightly lower in Q3 as mortgage loan-sale gains fell to $0.3 million from $1.5 million, reflecting lower production, compressed margins, and a lower saleable mix amid rising rates. Nine-month noninterest income included an $8.4 million legal settlement.
- Noninterest expense increased, with the filing citing Cortland-related costs, higher healthcare benefit costs, and merger expenses. Nine-month expense also included a $6.0 million charitable contribution and $2.1 million of legal expense associated with the settlement.
- Gross loans increased $68.9 million from December 31, 2021. Deposits increased $20.0 million, including $42.5 million of brokered time deposits; short-term borrowings increased by $155 million.
- Stockholders’ equity fell $206.8 million from year-end, principally due to a $238.5 million after-tax decline in accumulated other comprehensive income (AOCI), as rising interest rates reduced the fair value of available-for-sale securities. Book value per share declined from $13.94 to $7.80.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management said it viewed liquidity as adequate and the allowance for credit losses as adequate.
- The Emclaire Financial merger had shareholder approval but remained subject to customary regulatory approvals and other closing conditions; management expected completion in Q4 2022. Emclaire reported $1.0 billion of assets, $810.1 million of gross loans, and $926.7 million of deposits at September 30, 2022.
- The available-for-sale securities portfolio had $290.3 million of gross unrealized losses at September 30, versus $13.7 million at December 31, 2021. Management attributed the losses primarily to noncredit factors, including interest-rate and market changes, and recorded no credit-loss allowance on those securities. The filing identifies these losses in OCI/AOCI; they materially reduced reported equity.
- Credit indicators included nonperforming loans of $13.0 million, or 0.54% of loans; 30–89 day delinquencies of $6.7 million, or 0.28%; and an allowance for credit losses of $27.3 million, or 1.14% of loans. Q3 net charge-offs were $605,000, compared with $286,000 a year earlier.
- Interest-rate simulation at September 30 showed modeled net interest income changes ranging from positive 0.8% under a +300-basis-point shock to negative 13.3% under a -300-basis-point shock. Modeled net present value of equity declined 19.7% under a -300-basis-point shock.
- Farmers disclosed a pending putative class action alleging improper multiple NSF fees. The court denied the company’s motion to dismiss; Farmers intends to defend the case. The company said it could not determine whether an adverse result was reasonably possible or estimate any loss.
- Other risks identified include economic and credit conditions, inflation and Federal Reserve actions, interest-rate changes, competition, regulation, technology, and employee retention. Actual results may differ from forward-looking statements.
Most important facts for investors to verify
- Whether the Emclaire transaction received regulatory approval, closed as expected, and delivered anticipated integration benefits and costs.
- How higher interest rates, deposit pricing, and funding needs affect net interest margin, including reliance on brokered deposits and FHLB advances.
- Whether securities-related unrealized losses remain primarily rate-driven, and how AOCI, tangible/book value, and regulatory capital respond to market movements or any securities sales.
- Whether loan growth, delinquencies, charge-offs, criticized assets, and allowance levels remain consistent with management’s credit-quality assessment.
- The resolution and potential financial impact of the NSF-fee litigation, and whether the reported legal settlement and related expenses are nonrecurring.