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We have been adamant over the last few weeks that it is time to start buying financials and we really love buying regional banks here and on any further weakness. We believe they are well-positioned for growth over the next few years in this rising rate environment. They have relatively easy-to-understand balance sheets, and tend to really benefit from bread-and-butter banking. What we mean by that is they do well from taking in deposits, paying a small degree of interest, and then lending at higher rates. We strongly believe there are opportunities in the regional banks. Farmers National Banc Corp. (NASDAQ:FMNB) stock is one that we like as it has pulled back. After just reporting its Q3 earnings, it is now trading at $13.13 per share at the time of this writing, and that this is a solid entry point. We think it is a good buy at these levels. We want to own quality regional banks as interest rates are rising, and profit from the big increase in net interest income that will be realized in future quarters. As rates rise, the bank will have more earnings power potential. Perhaps this is repetitive to those who follow our work, but to the uninitiated, the spread on money the bank lends its customers relative to what it pays out in interest on the deposits it takes in will widen over the next few quarters. While there have been concerns on the economic front that have hurt lending short term (the shock of higher rates to new borrowers, fears of recession, sinking housing demand, etc.), we believe the regional banks will be winners. Overall, quarter-to-quarter, performance will vary, but at these levels we like the stock for entry. The company has been acquiring other banks, expanding its footprint, and growing organically as well. Coupled with a 4.5% dividend yield that pays you to wait, FMNB stock is another choice to consider when adding regional banks to your portfolio.
Farmers National Banc Corp. Q3 performance strong
In the just reported quarter the bank saw deposits decline, similar to many regional banks we have covered. Some of this is due to competition for deposits due to better rates now being offered. That said, the company grew its loan portfolio. Still, the earnings power of the bank is impressive. Revenues jumped in Q3, with Farmers National bringing in $40.6 million. These revenues of $40.6 million were a 14.3% increase year-over-year. Many regional banks have increased loan loss provisions ahead of possible economic turmoil in coming quarters (we are of the opinion any recession impacts will be mild). This year, loan loss provisions were $448,000, increasing from credits earlier in the year. However, a year ago loss provisions were double this amount. Expenses were well managed, and Farmers National saw net interest income widen. Margins were about flat from Q2 surprisingly, but we expect improvement moving forward. Overall, Farmers National net income actually widened to $16.2 million on an adjusted basis or $0.48 per share compared to $16.0 million or $0.56 per share in the same quarter of 2021. This beat consensus expectations by $0.01. Overall, it was a mixed quarter, but better days are ahead in our opinion.
Growth in loans for Farmers National Banc Corp.
Farmers National had long grown its deposits. Having more deposits helps fund more loans. As rates increase, they can make better-termed loans and make more money on those deposits. That said, deposits dipped to $3.57 billion from $3.63 billion to start the quarter.
Over on the loan front, much like deposits, the acquisitions they have done have helped over the years. Loans grew organically however from the sequential quarter. Gross loans were $2.40 billion at the end of the quarter vs. $2.37 billion to start the quarter. This growth is certainly welcomed, and new loans are coming with better rates. As we move into Q4 rates are so much higher, and will have even better terms. Growth of loans were 4.6% on an annualized basis.
Farmers National Banc Corp. asset quality improves
It is great to have loans expanding but we need to make sure the loans held are of quality nature. In short, we need to review asset quality. We need to ensure that the assets held are performing. That said, the ratio of the non-performing loans to total loans declined once again to 0.54% to end the quarter compared to 0.69% at the start of the year. That is pretty amazing progress.
There have been improvements in delinquencies despite the pain if rising rates and inflation. Delinquencies, defined as those 30-89 days late, were $6.7 million, or 0.28% of total loans at the end of Q3. This compares to $8.9 million, or 0.38% of total loans to start the year.
On top of this improvement, the allowance for credit losses was 1.14% of all loans to end the quarter, down from 1.26% at the start of the year.
Highly efficient bank
Farmers National has a superb efficiency ratio. This ratio has largely improved over the last few years. Those who follow our work regularly know that a 50% efficiency ratio is what we define as gold standard. In Q3, Farmers National saw an efficiency ratio was of 48.46%. This is a very strong result. We have to also point out that the return on average assets and equity improved. The return on average assets improved to 1.48% vs. 0.58% to start the year while the return on average equity came in at 18.71% vs 5.2% in to start the year. This is highly efficient.
Solid dividend yield pays you to wait for a turnaround
As we mentioned in the opening, the bank also pays a dividend and is currently yielding 4.5%. The dividend paid is $0.16 quarterly and is in little danger of being cut based on the payout ratio being 27%. What is more, the dividend is likely to continue to be raised if history is a guide.
Valuation
We do not love the valuation here. It is relatively attractive compared to a lot of other regional banks we have covered on some metrics, but expensive on others. That said, these share prices are above book value. Book value per share was $8.48 to end the quarter and fell all year. According to management in the release:
The decrease in stockholders’ equity has primarily been due to the decline in accumulated other comprehensive income associated with the rapid increase in U.S. treasury rates in 2022 which has had a negative effect on the value of the Company’s available for sale securities, and in turn, the dollar amount that flows through accumulated other comprehensive income.
Tangible book was even lower at $4.79. The decline in book in our opinion is temporary. While shares are at a premium, and readers can certainly choose to look elsewhere, we think the stock still works here. still attractive given the improved outlook for the future in our opinion.
Take home
While book value has eroded, and share prices have come down, the bank is looking in fine shape. The dividend is offering a hefty yield. Loans are growing. Asset quality is strong. We see improvement in 2023. Overall, we think this stock is a buy as interest rates rise into 2023.
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