FMNB - Farmers National: Tough Times Big Income

2023-10-12 15:58:17 ET

Summary

• Farmers National Banc Corp. is a buy for investors and traders, offering upside potential as interest rates settle.
• The bank is well-positioned to benefit from the growth of the U.S. agricultural sector.
• Despite a mixed performance in Q2, the bank has industry-leading asset quality and a strong deposit base.
• Buy for big income, stay for capital appreciation.

As investors and traders in the financial sector, we closely follow the operational performance of a number of banking institutions. When looking to buy or sell we believe in examining closely the key metrics you need to be aware of. Today, we believe that after the relentless selling in many of the banks given the march higher in interest rates, Farmers National Banc Corp. (FMNB) is a buy. We believe this bank offers a sizable upside in the next two to three years as the industry resets while rates settle down. We think you can start to buy now, be paid a healthy dividend to wait and enjoy future capital appreciation. Successful traders cannot worry about the day-to-day, but rather the month-to-month. We see day traders as money losers, generally speaking, but those who trade month to month, taking still a short, to medium-term view, as outperforming very near-term investors, and outperforming simple buy and hold. While the latter strategies have their place, we like that sweet spot in the middle. That said, to do it right, you need to have the resolve to buy quality companies when the near-term macro environment is volatile. We believe FMNB stock represents an opportunity for both dividend income and future capital appreciation. But it has been a tough few months for the stock.

As you can see the stock has completely roundtripped back to late 2020 levels. This comes despite the growing US agricultural sector which is expected to grow in the coming years, driven by increasing global demand for food from both consumers and businesses. This growth should benefit Farmers National, which has a large exposure to the agricultural sector. We think with a 6% yield, there is nice income to be had here while you wait for a turn. Here is how we would play it.

The play

Target entry 1: $10.98-$11.00 (25% of position)

Target entry 2: $10.50-$11.60 (35% of position)

Target entry 3: $10.30-$10.35 (40% of position)

Target exit: $13

Stop loss: 8.65

Note: This is the type of trade with clear entry and exit targets that are provided by BAD BEAT Investing. Options considerations/inquiries for any trades are reserved for the investing group

Discussion

The bank's recently reported earnings show key trends and metrics have weakened in this climate. However, we believe this is a temporary setback, and that the bank is well-positioned to benefit from the long-term growth of the US economy and the agricultural sector. We also see the bank having success as the rate hiking campaign comes to an end, and the economy normalizes. The market has priced in earnings declines and pressure in net interest income, given the higher amount of costs on deposits, while loan demand is softening near-term. With that said, the bank has a strong track record of profitability and growth, and it is well-capitalized. The bank has a strong deposit base and a robust loan portfolio. Farmers National Banc Corp. is also one of the most efficient banks in the industry

In Q2, Farmers National Banc Corp. saw deposits decline slightly from Q1, but remain up since the start of the year following the acquisition of Emclaire Financial. Competition for deposits remains strong right now due to better rates being offered to attract customer dollars. That said, the company grew its loan portfolio from the sequential Q1. Revenues rose in Q2, with Farmers National bringing in $44 million. These revenues were a 4.7% increase year-over-year, but missed expectations by $2.5 million while benefitting from the aforementioned acquisition. Many regional banks have increased loan loss provisions ahead of a recession as they expect borrowers to be delinquent at a higher rate. This quarter, loan loss provisions were $25,000 decreasing from $616,000 last year. This is positive. Net interest margin narrowed from Q1, while most banks are seeing a widening margin. That was the reason for all of the misses and the selloff. The net interest margin was just 2.92% vs. 3.07% for Q1 2023 and was down from 3.16% for Q2 2022. As we have asserted, we have reached peak margins, for now. This has weighed on the stock. Overall, the bank saw a net interest income of $34.6 million in Q2 2023 compared to $31.7 million last year. Farmers National had more earning assets in 2023 due to the acquisition of Emclaire but this was partially offset by the decline of 33 basis points in the net interest margin. Total EPS was $0.41, in line.

Overall, it was a mixed quarter for Farmers National Banc Corp., driven by the margin compression. We think this works itself out this year, and think a 6% yield while you wait is a big income. Still, we like the loan growth. Farmers National had long grown its deposits until recently. That said, deposits dipped to $4.25 billion from $4.11 billion to start the quarter. Gross loans were up $3 million from the start of the quarter.

Despite the mixed performance overall, Farmers National Banc Corp. still has industry-leading asset quality. Non-performing loans were flat from the sequential Q1 at $18 million. In this climate, not seeing further non-performing loans is positive. The non-performing loan to total loans ratio was 0.57%. This is down from the start of the year's 0.62%, and flat from Q1. This is positive. Non-performing assets to total assets have remained stable all year at 0.36%, which is strong. We also like that Farmers National has an extraordinary 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 Q2, Farmers National saw an efficiency ratio of 56.28%, an improvement from 62.53%. However, a year ago this metric was 49.9%, and the tick-up in the metric is a direct result of the margin pressure. That said, the return on average assets jumped from Q1, which is another positive. The return on average assets improved to 1.18% vs. 0.56% to start the quarter while the return on average equity came in at 16.12% vs 7.71% in the sequential Q1.

Overall, the bank is in very healthy shape. We think you get paid to wait here. Farmers National Banc Corp. share prices have declined markedly in the last few months, but the bank is fine shape. The yield is strong and the dividend is safe. Buy it for income, and stay for the capital appreciation on the trade.

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