FMNB - Farmers National: Selloff Creates Attractive Entry Point

Summary

• Big decline in deposits has led to Farmers National Banc Corp. scrambling for funding, and that hurt its Q4 results.
• Farmers National loans are still growing and asset quality is sound.
• Farmers National is a very efficient bank even with the short-term cost of funds issue.
• The Farmers National Banc Corp. 5.2% yield is very attractive.

As this market continues to rally, having one of its best 2 weeks stretches in a year, we are looking for opportunity. We really believe this market is on thin ice at these levels and is set to pull back. Right now, only company-specific news is sending stocks lower, as this tape has been very strong. It is worrisome, to be honest.

With that said, Farmers National Banc Corp. ( FMNB ) stock took a nosedive on just reported earnings , and we think that it is at a compelling entry point to be sure. We have covered many banks recently, and we would conclude that banks are preparing for a mild recession, as evidenced by big increases in loan loss provisions. Banks are very healthy here, with strong net interest margins and broader increased loan activity, while the competition for customer deposits has increased dramatically.

We have made a lot of money in the bank stocks, as in late summer and early fall of 2022 we pushed our members to start buying financials . Right now, we think you need to wait for a pull back for most stocks, but FMNB dropped on earnings and is now yielding a healthy 5.2% going forward . We like buying FMNB sub-$13

Farmers National Banc Corp. Q4 performance mixed

Farmers National Banc Corp. saw deposits decline, similar to many regional banks we have covered. Competition for deposits is strong right now due to better rates now being offered. That said, the company grew its loan portfolio. Revenues fell in Q4, with Farmers National bringing in $38.4 million. These revenues of $38.4 million were a 4.4% decrease year-over-year, and missed expectations by $2 million. Many regional banks have increased loan loss provisions ahead of a recession as they expect borrowers to be delinquent at a higher rate. This year, loan loss provisions were $416,000, increasing from credits earlier in the year. The problem the Street had with this quarter was that net interest margin narrowed from Q3, while most banks are seeing a widening. That was the reason for all of the misses and the selloff. The net interest margin was just 2.99% vs. 3.21% for Q3 2022 and was down from 3.33% for Q1 2021.

Why is this happening? Well, The decline in net interest margin was caused by a rapid increase in deposit interest rates being paid due to intense competition for deposits that we have talked about in many articles. It was also a result of the continued Federal Reserve rate hiking cycle and runoff of deposit balances. Those deposits are being replaced by more expensive wholesale funding, weighing on margin. It is not all bad, as loans continue to reprice higher but they just have not been able to keep up with the increase in funding costs. Overall, Farmers National net income actually widened to $13.4 million on an adjusted basis or $0.42 per share. This missed consensus expectations by $0.03.

Overall, it was a mixed quarter for Farmers National Banc Corp., driven by the deposit issue. We think this works itself out this year, and think a 5.2% yield while you wait is mighty fine.

Growth in loans for Farmers National Banc Corp.

Farmers National had long grown its deposits until recently. That said, deposits dipped to $3.42 billion from $3.52 billion to start the quarter. Gross loans were $2.40 billion at the end of the quarter rising $5.2 million from the start of the quarter. As we move further into 2023, rates are so much higher, and will have even better terms on loans so long as the funding side of the equation stabilizes which we suspect it will. Growth of loans were 4.6% on an annualized basis.

Farmers National Banc Corp. asset quality improves

Despite the headline carnage, Farmers National Banc Corp. sports high asset quality. Non-performing loans were down from a year ago, at $14.8 million versus $16.2 million a year ago. The non-performing loan to total loans ratio was 0.62% compared to 0.69% a year ago. Non-performing assets to total assets has also declined from 0.39% a year ago to 0.36% here. That is great news. Farmers National has a superb efficiency ratio as well, but it weakened due to the cost of deposits. This ratio has largely improved over the last few years but in Q4, Farmers National saw an efficiency ratio was of 52.59% which on its own is a very strong result, but worsened from 50.55% last quarter. We have to also point out that the return on average assets declined but return on equity improved. The return on average assets improved to 1.31% vs. 1.48% to start the year while the return on average equity came in at 20.16% vs 18.71% in Q3.

Take-home

The Farmers National Banc Corp. share prices have come down, but the bank is fine. It was a tough quarter, but we expect stabilization in 2023. With Farmers National Banc Corp. stock on sale we love the 5.2% yield and growing the dividend is likely, so scale in under $13, and get paid to wait.

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