Business context and reporting period
Farmers National Banc Corp. is an Ohio-based financial holding company providing banking, trust, retirement consulting and insurance services, primarily in northeastern Ohio and western Pennsylvania. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $26.5 | $24.2 | $78.3 | $70.4 |
| Provision (credit) for credit losses | $(0.9) | $2.6 | $(0.5) | $6.1 |
| Noninterest income | $9.0 | $9.2 | $28.7 | $25.7 |
| Noninterest expense | $17.1 | $17.5 | $51.6 | $53.4 |
| Net income | $16.0 | $10.9 | $46.1 | $30.5 |
| Diluted EPS | $0.56 | $0.38 | $1.63 | $1.07 |
| Net interest margin, tax-equivalent | 3.47% | 3.55% | 3.50% | 3.64% |
- Quarterly and nine-month net income increased about 47% and 51%, respectively. The company attributed much of the quarterly improvement to lower credit-loss provisions, including a $0.9 million provision credit versus $2.6 million of expense a year earlier.
- Quarterly noninterest income was slightly lower: reduced mortgage loan-sale gains, reflecting lower origination volumes, offset growth in trust fees, investment commissions and securities gains. Nine-month noninterest income rose 11.9%.
- The efficiency ratio improved to 46.0% for Q3 and 46.5% year to date, from 50.4% and 53.5%, respectively. Annualized Q3 return on average assets was 1.92%; return on average equity was 16.93%.
- At September 30, total assets were $3.317 billion, up from $3.071 billion at December 31, 2020. Deposits were $2.866 billion, up from $2.611 billion; stockholders’ equity was $377.5 million, up from $350.1 million.
- Gross loans were $1.894 billion, down from $2.078 billion at year-end, primarily due to Paycheck Protection Program (PPP) loan forgiveness and paydowns. Available-for-sale securities grew to $1.183 billion from $575.6 million; management said it intended to continue investing excess cash in securities.
- Net interest margin narrowed despite higher net interest income. Management reported lower earning-asset yields, partly offset by lower funding costs; low rates remain a potential margin headwind.
- For the first nine months, operating cash flow was $40.0 million, investing cash flow was $(431.3) million, and financing cash flow was $216.6 million. Cash and cash equivalents declined to $79.8 million from $254.6 million at year-end, primarily reflecting securities purchases.
- Borrowings declined to $49.6 million from $78.9 million at year-end; there were no short-term borrowings. The company reported $2.866 billion of deposits, a 66.08% loans-to-deposits ratio, and $579.9 million of additional FHLB borrowing capacity. Management stated liquidity was adequate.
- Capital remained above regulatory minimums: consolidated common equity Tier 1 ratio was 14.55%, total risk-based capital 16.21%, and Tier 1 leverage 10.17%. The Bank was categorized as well capitalized.
Material changes, outlook, risks and unusual items
- Credit quality indicators were mixed: nonperforming loans increased to 0.78% of loans from 0.55% a year earlier, while 30–89-day delinquencies declined to 0.37% from 0.47%. Nonperforming assets were 0.44% of total assets. Net charge-offs were $286,000 for Q3, or 0.06% annualized of average net loans.
- The allowance for credit losses was $23.1 million, or 1.22% of loans, compared with 0.90% a year earlier. The company adopted CECL on January 1, 2021, recording a $1.9 million after-tax reduction to retained earnings and a $2.5 million increase to the allowance. Management considered the allowance adequate.
- Available-for-sale securities had $8.0 million of gross unrealized losses at quarter-end, versus $0.5 million at December 31, 2020. Management attributed the losses to noncredit factors, principally interest rates and market conditions, and recorded no securities credit-loss allowance. After-tax accumulated other comprehensive income fell $7.8 million year to date.
- COVID-19 may continue to affect borrowers, fee income and credit quality. The company had waived $780,000 of fees since the pandemic began and reported one borrower still deferring payments. It warned that accrued income could be reversed if deferred loans ultimately incur credit losses. Approximately $53.6 million of PPP loans remained outstanding at quarter-end.
- On November 1, 2021, after the reporting date, the company completed its merger with Cortland Bancorp. Cortland reported September 30 assets of $799.2 million, gross loans of $500.0 million and deposits of $693.0 million. Consideration was a mix of cash and Farmers shares, subject to an overall 75% stock-exchange limit. Integration outcomes and transaction effects are not reflected in the September 30 financial statements.
- Interest-rate simulations showed a 100-basis-point decline would reduce modeled net interest income by 5.7% and net present value of equity by 22.8%, exceeding internal policy limits. Management cited the limited ability to lower rates on core deposits and said it would continue monitoring the exposure.
- Other noted risks include inflation, general economic and regulatory conditions, competition, and possible changes in tax law; the filing discussed a proposed increase in the federal corporate tax rate. Ordinary-course lawsuits are pending; the company stated an unfavorable resolution could materially affect a particular future period, but the amount and timing are unknown.
- No specific financial guidance or numerical outlook was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth is sustainable without the quarterly credit-provision release, and how credit quality and the allowance develop as pandemic-related effects evolve.
- Whether the expanded securities portfolio and lower loan share of earning assets support returns or increase sensitivity to rates, valuation changes and prepayments.
- Post-close Cortland integration, realized synergies, acquisition costs, capital effects and any subsequent pro forma financial disclosures.
- Liquidity and deposit trends, including the mix and persistence of public-fund and PPP-related deposits, and progress in maintaining margins if rates remain low or change.
- The company’s subsequent filings for developments in the policy-limit interest-rate exposure, pending legal matters, and proposed tax legislation.