Business context and reporting period
Farmers National Banc Corp. filed this Form 10-K for the fiscal year ended December 31, 2020. The Ohio-based financial holding company operates primarily through its community bank and trust businesses, serving northeastern Ohio and one location in Pennsylvania.
On January 7, 2020, Farmers completed its acquisition of Maple Leaf Financial, parent of Geauga Savings Bank. Consideration was approximately $43.0 million, including $20.4 million in cash and 1,398,229 Farmers shares. The acquired business brought approximately $277.0 million in assets at closing.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $96.2 million | $82.4 million |
| Provision for loan losses | $9.1 million | $2.5 million |
| Noninterest income | $37.2 million | $28.6 million |
| Noninterest expense | $74.0 million | $65.5 million |
| Net income | $41.9 million | $35.8 million |
| Diluted EPS | $1.47 | $1.28 |
| Net interest margin, taxable-equivalent | 3.70% | 3.82% |
| Return on average assets / equity | 1.46% / 12.80% | 1.50% / 12.56% |
Net interest income and net income rose despite lower margins. Growth in average earning assets, reduced funding costs, the Maple Leaf acquisition and higher gains on mortgage loan sales contributed. Loan-sale gains increased to $12.3 million from $4.4 million. The efficiency ratio improved to 52.82% from 56.59%.
At year-end, total assets were $3.07 billion, net loans $2.06 billion, deposits $2.61 billion and stockholders’ equity $350.1 million. Total deposits increased 30.0% from 2019, while net loans rose 14.4%; management attributed part of the growth to the acquisition and pandemic-related deposits and PPP lending. Cash and cash equivalents were $254.6 million, and unpledged investment securities totaled $201.9 million. Core deposits were 93.4% of deposits.
Year-end short- and long-term borrowings were $2.5 million and $76.4 million, respectively. The bank had no short-term FHLB advances at year-end and reported $549.5 million of additional FHLB borrowing capacity against pledged collateral. Operating cash flow was $50.0 million; investing activities used $160.8 million, and financing activities provided $294.7 million.
The allowance for loan losses was $22.1 million, or 1.07% of loans, versus $14.5 million and 0.80% in 2019. Nonperforming loans were $13.8 million, or 0.67% of loans, compared with $6.3 million and 0.35%. Net charge-offs were $1.4 million. The bank was categorized as well capitalized; its year-end CET1 ratio was 12.71% and total risk-based capital ratio was 13.76%.
Material changes versus the prior comparable period
- Net income increased 17.1% and diluted EPS increased from $1.28 to $1.47. Return on assets declined from 1.50% to 1.46%.
- Net interest margin contracted 12 basis points to 3.70%, reflecting lower market rates. Interest expense fell 17.7% to $16.1 million as funding costs declined.
- Provision for loan losses rose to $9.1 million from $2.5 million, principally due to uncertainty related to COVID-19. Nonperforming loans increased to 0.67% of loans from 0.35%.
- Noninterest income rose 29.9%, largely from mortgage loan-sale gains. Noninterest expense increased 13.0%, including acquisition costs, higher compensation and COVID-related captive insurance claims.
- Total assets grew 25.4%, with the Maple Leaf acquisition and deposit growth contributing. The Company repurchased 942,967 shares during 2020 and suspended its repurchase program during the year.
Outlook, risks and unusual items
Management expected noninterest income to remain steady or decline slightly in 2021, anticipating lower mortgage loan-sale gains. It expected an effective tax rate of 15%–17%. The filing provides no specific earnings or revenue guidance.
Key risks include the duration and economic effects of COVID-19, borrower repayment capacity, local economic and real-estate conditions, concentration in real-estate lending, interest-rate changes, competition, acquisition integration and regulatory changes. Real-estate-related loans represented 68.3% of the loan portfolio. Management reported that COVID-related payment deferrals had declined; at year-end, nine loans totaling $20.5 million remained in deferral. Farmers had facilitated $199.8 million of PPP loans for 1,714 businesses, with $67.6 million forgiven by year-end.
The company adopted CECL on January 1, 2021 after pandemic-related relief delayed adoption in 2020. Management expected the adoption adjustment to increase the allowance by 5%–10%; it did not expect that estimate to change in the first quarter, subject to new information. Interest-rate modeling showed a 19.0% decline in the economic value of equity under a 100-basis-point rate decrease, exceeding the company’s policy guideline.
Management said pending and threatened legal actions were not expected, individually or collectively, to materially affect results or equity based on information then available, while noting an unfavorable resolution could materially affect a particular future period. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether higher nonperforming loans and the enlarged loss allowance adequately reflect COVID-19-related and regional credit risks, especially in commercial and real estate portfolios.
- How quickly the lower net interest margin, mortgage-sale gains and funding costs evolve, and whether 2021 fee income meets management’s stated outlook.
- The final CECL transition adjustment and subsequent allowance levels, including the effect of updated economic forecasts.
- Liquidity and funding resilience, including deposit composition, scheduled certificate maturities, FHLB capacity and pledged collateral.
- The implications of the disclosed interest-rate sensitivity policy exception for economic value of equity and capital distributions.
- Acquisition integration, expected cost savings and the effect of acquisition-related costs; also confirm dividend capacity given regulatory limits and the 2020 share-repurchase suspension.