Farmers National Banc Corp. — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022. Farmers National Banc Corp. is an Ohio financial holding company providing banking, trust, insurance and investment services, primarily in northeastern Ohio and western Pennsylvania. The November 2021 Cortland acquisition affects year-over-year comparisons.
Key financial results
Amounts are in millions of dollars, except per-share data and ratios.
| Metric | Q1 2022 | Q1 2021 or prior date |
|---|---|---|
| Interest and dividend income | $33.3 | $27.8 |
| Net interest income | $31.2 | $25.3 |
| Net interest margin | 3.27% | 3.54% |
| Noninterest income | $17.7 | $10.1 |
| Noninterest expense | $30.5 | $17.3 |
| Net income | $15.8 | $14.6 |
| Diluted earnings per share | $0.47 | $0.51 |
| Return on average assets / equity | 1.52% / 13.89% | 1.87% / 16.81% |
| Efficiency ratio, tax-equivalent basis | 61.36% | 48.24% |
- Net interest income grew 24%, reflecting increased earning assets, including Cortland, despite a 27-basis-point decline in net interest margin. Management attributed lower asset yields to excess liquidity invested in lower-yielding securities, limited loan growth and lower PPP income.
- Noninterest income included an $8.4 million legal settlement. Noninterest expense included a $6.0 million charitable contribution, $1.9 million of Cortland merger costs and approximately $2.1 million of legal expense associated with the settlement.
- Net income increased, but diluted EPS declined; average diluted shares rose to 33.9 million from 28.3 million, largely reflecting the Cortland acquisition.
Financial position, cash flow and credit
- Total assets were $4.21 billion at March 31, 2022, up from $4.14 billion at year-end. Gross loans were $2.30 billion, down $26.1 million from year-end; excluding PPP runoff, management reported a $12.4 million decline.
- Deposits rose $146.6 million to $3.69 billion, including $40.0 million of brokered time deposits. The loan-to-deposit ratio was 62.40%, compared with 71.92% in Q1 2021.
- Cash and cash equivalents were $137.6 million, up $24.8 million from year-end. Operating cash flow was $13.2 million; investing activities used $129.5 million, while financing activities provided $141.2 million, mainly from deposit growth.
- Long-term borrowings were $87.9 million, principally subordinated debt; there were no FHLB advances or draws on disclosed bank credit lines. The Bank had $679.8 million of additional FHLB borrowing capacity and access to a $35 million bank line and the Federal Reserve Discount Window.
- Allowance for credit losses was $27.0 million, or 1.17% of loans, versus $29.4 million at year-end. The quarter included a $930,000 reversal of provision for credit losses and a $572,000 provision for unfunded loans. Net charge-offs were $1.44 million, compared with $84,000 a year earlier.
- Nonperforming loans were $14.0 million, or 0.61% of loans; nonperforming assets were 0.33% of total assets. Loans 30–89 days past due totaled $7.3 million, or 0.32% of loans. Management stated it considered the allowance adequate.
- Stockholders’ equity fell $78.5 million to $393.9 million, primarily from an $88.8 million after-tax other comprehensive loss on available-for-sale securities, partly offset by earnings. Book value per share declined from $13.94 to $11.58. The filing attributes the securities valuation decline to rising Treasury rates, not credit deterioration, and reports no allowance for credit losses on AFS securities.
- Capital ratios remained above stated regulatory minimums: consolidated common equity Tier 1 was 13.31%, total risk-based capital 17.59%, Tier 1 risk-based capital 13.95% and Tier 1 leverage 9.56%. The Bank was classified as well capitalized.
Material changes, outlook and risks
- Farmers agreed to acquire Emclaire Financial Corp. on March 23, 2022. The transaction, subject to shareholder and customary regulatory approvals, was expected to close in the second half of 2022. Emclaire reported $1.1 billion of assets, $794.9 million of gross loans and $936.0 million of deposits at March 31, 2022; the deal would expand Farmers into western Pennsylvania and the Pittsburgh market.
- Management said Cortland integration savings were only partially realized in Q1 because system conversion occurred in late February; full cost savings were expected during the remainder of 2022. This is management’s stated expectation, not formal earnings guidance.
- Interest-rate risk is a key exposure. The filing’s model showed that a 100-basis-point rate decrease would reduce net interest income by 3.0% and net present value of equity by 8.8%; the NPV result exceeded the company’s internal guideline. The company said modeled rate changes were within internal limits at quarter-end and that it would continue monitoring exceptions.
- Other stated risks include economic and COVID-19 effects on borrowers, credit quality, interest-rate and mortgage-market movements, competition, regulation, technology and loan demand. The company also faces ordinary-course legal proceedings; unfavorable outcomes could materially affect a future period, though the amount and timing are uncertain.
- Unused customer commitments totaled $627.9 million. The filing states these commitments may expire undrawn and do not necessarily represent future cash needs.
Important facts for investors to verify
- Whether and when the Emclaire transaction receives approvals, closes, and produces the anticipated expansion and integration benefits.
- Whether Cortland cost savings materialize as expected, and how ongoing merger costs affect expenses and the efficiency ratio.
- Underlying earnings excluding the $8.4 million settlement and related legal expense, as well as the $6.0 million charitable contribution.
- Further changes in securities values, accumulated other comprehensive income, book value and capital as interest rates move.
- Loan growth, PPP runoff, net charge-offs, nonperforming loans and the adequacy of the allowance as economic and borrower conditions evolve.
- Deposit mix and funding costs, including the role of brokered deposits, and the company’s sensitivity to rate changes.