Farmers National Banc Corp.: Sowing Prudence, Reaping Rewards
Summary
- Farmers National Banc Corp. continues to flourish with steady revenue growth and adequate cash inflows.
- Its impressive liquidity and viability show promising growth potential.
- Its quarterly dividends remain at $0.11 per share.
- The stock price appears cheaper and undervalued as the downward trend persists.
- It must prepare for post-pandemic inflation as the economy gradually reopens.
Farmers National Banc Corp. (NASDAQ: FMNB) continues to maneuver its operations with ease and prudence despite the disruptions of the pandemic. It remains capable of increasing its operating capacity and sustaining dividends. Even so, the undervalued stock price seems quite divorced from fundamentals at this moment.
Company Financials
Interest Income and Interest Expense
Farmers National Banc Corp. has seen several economic downturns that could have crushed its operations. Despite being highly susceptible to risks associated with macroeconomic changes, it continued to prosper over the years. It remains durable and competitive, although it is relatively smaller than many banks in the US.
For the last five years, FMNB has shown substantial changes. Interest income soared high from $72 million to $102 million with an average growth of 12% per year. Likewise, the interest expense has grown from $4.4 million to $19.6 million. Even if the increase in expenses was faster, net interest income has consistently risen from $68 million to $82 million. But as expected, Gross Profit Margin decreased from 92% to 81%.
Nevertheless, it continued to grow while increasing its liquidity and adequacy. And if it is checked with the Balance Sheet, one can verify that both loans and deposits have increased substantially as the interest rates rose from 2.17% to 3.27%. Meanwhile, the Loan-to-Deposit Ratio fell from 95% to 89%.
In FY 2020, it completed its acquisition of Maple Leaf Financial, Inc. Despite the disruptions in the whole economy, FMNB continued to flourish. Loans continued to increase due to almost zero interest rates. It can be proven as the general price level in the real estate industry increased substantially, driven by an upsurge in demand. According to Norada, the most recent median listing price reached $370,000. With its prudent management of loans, its interest income rose by 10%. Deposits also grew as the pandemic ensued. But since interest rates were almost zero, interest expense decreased to $16.4 million. Hence, Gross Profit Margin bounced back to 86%.
Currently, the celebration continues with the release of the 1Q 2021 Report. Since the interest rates remained low, interest income did not change much. At $27.79, it was only 1% higher than the value using a year-over-year comparison. But with the reduction of interest expenses by 46%, net interest income increased to $25.26 million, so Gross Profit Margin rose to 90%. The company continues its careful management of loans and deposits while ensuring its sustained growth and viability. Given the improving condition of the economy, the fruitful results may continue. It is logical as more people are becoming capable again of applying for loans and paying their borrowings. Also, the hype in the real estate industry persists which makes loans enticing. As posted on CNBC, the labor market continues to improve as the unemployment rate decreased to 6% while the interest rates are still held near 0. To stabilize the economy, the Fed must raise interest rates. According to The Mortgage Reports, the current mortgage rate is 3.04%. Due to the boom in real estate, it may increase to 3.31%. But given the expected transition from recession to recovery, the changes may remain gradual. With that, the interest income and expense will most likely go up.
Moreover, the Linear Trend Analysis verifies the supposition. It projects interest income and interest expense to increase to $119 million and $17 million, respectively. The only thing that it must watch out for is the possibility of post-pandemic inflation that may affect its operations. Nevertheless, given its strong financial position, its preparation and continued growth will help it thwart the adverse effects. As long as the policymakers remain prudent in managing macroeconomic changes, things will run smoothly for FMNB and the whole industry.
Taken from MarketWatch
Taken from MarketWatch
Taken from MarketWatch
Net Income
The other side of the core operations, primarily composed of non-interest income, has also increased from $23 million to $37 million in 2016-2020. Likewise, non-interest expenses have increased from $60 million to $70 million. Despite the limited physical operations amidst the pandemic, the positive change in that year was the highest since 2016. The uptrend in digital and online transactions quickly covered the decrease in physical transactions. Hence, the operating income increased by 21.6%, and the operating margin eventually reached 48%.
Meanwhile, the non-core operating transactions remained relatively smaller than the core operations. Although the exceptional expenses rose from $197,000 to $3 million, it did not offset the increase in the core operations. And since taxes had no noticeable changes, net income continuously increased from $21 million to $40 million. Currently, The Wall Street Journal and Nasdaq estimation are not optimistic, but their projected values for the next FYs will be near FY 2020. Meanwhile, the Linear Trend Analysis estimation shows that net income may increase from $45 million to $51 million. Given its 1Q 2021 value at $14.5 million, it adheres to the optimistic view of its performance.
Taken from MarketWatch
Taken from MarketWatch
Return on Asset
As a bank with more than $1 billion in assets, FMNB has shown ideal growth for the last five years. With its generally increasing trend, its capitalization on growth through acquisitions has been fruitful. From 1.04%, it grew to 1.45%.
In FY 2020, the Return on Asset ("ROA") decreased but remained stable at 1.36%. It shows that despite the disruptive environment, its growth remained ideal. Its investments grew by 68% as capital markets also flourished. Loans increased by 14% since lower interest rates encouraged more borrowings. Given this, amidst the disruptions brought upon by the pandemic, the operations of the company continued to expand. It may continue as the reopening of the economy may stabilize and improve macroeconomic changes. As the Linear Trend Analysis estimated, ROA may gradually increase from 1.4% to 1.46% for the next FYs.
Taken from MarketWatch
Return on Equity
Its growth can still be proven even if it will be compared to its peers. From 2016 to 2020, its Return on Equity ("ROE") has always been higher than the average ROE of the banking industry. It means that the acquisitions worked to their advantage. It is true in 2019-2020 as the gap continued to widen and showed that it had outperformed most of its peers. Moreover, its gap with assets remained reasonable which conveys a successful attempt to maintain the balance in its financial leverage.
Regarding growth, it can also be estimated using its Sustainable Growth Rate ("SGR") by determining its Retention Ratio which will be multiplied by the ROE. Given the most recent ROE and Retention Ratio of 12% and 72%, SGR amounts to 8.6%. It means that the company may grow further by 8.6% without increasing its financial leverage, especially borrowings.
Taken from MarketWatch
Loans, Deposits, and Loan-to-Deposit Ratio
As the blood life of the company, loans and deposits are its primary growth drivers. For the last five years, loans and deposits have grown by 46% and 74%, respectively. It has been fruitful as the operations continued to expand. While growth has been consistent, the increase in loans relative to deposits decreased from 95% to 79%. It shows its conservative approach to growth, liquidity, and stability. Although loans are asset-based or collateralized, FMNB remained prudent in managing its lending and collection. It also became more cautious in FY 2020 when it raised its loan provisions by 45%.
The release of the 1Q 2021 Report confirmed it. The conservative management of loans increased borrowers' ability to pay decreased the loans to $2.04 billion and increased cash by 28%. The increase in deposits further reduced the ratio to 73%. Moreover, loan provisions went up and amounted to $24 million or 1.2%. With that, when things don't go right once the economy reopens, it has more reserves that will cushion it from risks of default and borrowers' inability to pay.
Taken from MarketWatch
What's in Store for the Investors?
Dividends Per Share
For about 20 years, FMNB has religiously paid dividends. Although there were years when it did not raise its payments, the values never went down. It sped up in 2016 and consistently increased from $0.16 per share to $0.44 per share in 2020. In 1Q 2021, it announced its dividend payments at $0.11 per share, so the annual value may remain at $0.44 per share.
With regards to the financial capacity, the increase in dividends never bothered the company. Using net income, the Dividend Payout Ratio has increased from 25% to 31%. It may appear relatively smaller, but the value remained reasonable as the average dividend growth for the given period reached 21%. Likewise, Free Cash Flow ("FCF") remained in an upward pattern which further verified the consistency in the financials and the adequacy to remain operational and raise dividends.
Taken from Nasdaq: Dividend History
Taken from MarketWatch and Nasdaq: Dividend History
Taken from MarketWatch and Nasdaq: Dividend History
Stock Price
Unlike most stocks, the downward pattern of FMNB extended to September 23 at $10. But since then, the uptrend has started, created a bullish pattern, and reached its new all-time high at $16.97 last April 7. Currently, the stock price is set at $16.35 and in a downtrend for about three weeks already. Despite this, both the price and volatility remain low. Meanwhile, the undervaluation is verified by the PE Ratio of 11.01, the PB Ratio of 1.36, and the PEG Ratio of 0.65. The derived stock price using the Dividend Discount Model at $20.86 shows the same observation.
Current Price: $16.35
Average Dividend Growth: 0.1586497209
Estimated Dividends Per Share: $0.44
Cost of Capital Equity: 0.1655610359
Derived Value: $20.88252029 or $20.88
Although the price ratios go along with fundamentals, the stock price moves in a downward pattern recently. But the reopening of the economy and the company's growth potential may outweigh the downward pressure and push the stock price upward. Hence, using its press releases and industry news for reference will help an interested individual develop an investment decision.
Potential Growth Catalysts
The Reopening of the Economy
Like most businesses, the reopening of the economy is a primary growth driver this FY. With the easing of restrictions, more companies with increased capacity are going back to operations. With that, more people get jobs and have a higher capacity to pay their loans. Also, the interest rates remain low which continue to entice loans, especially housing loans. Increased economic activities may drive aggregate demand growth and raise interest rates. The possibility of a price increase is also considered, although the change will be minimal due to the gradual transition. Moreover, it may drive the increase in interest income and net income as the company continues to grow with extra caution. One of the challenges it may face is the potential post-pandemic inflation that may cause an upsurge in interest rates and borrowers' decreased capacity to pay. Nevertheless, given its steady income growth and ample cash inflows, the company continues to reassure the stakeholders of its impressive performance. Also, its strong financial position with increased loan provisions and decreased Loan-to-Deposit Ratio shows higher liquidity and adequacy.
Conclusive Insights
Farmers National Banc Corp. remains one of the most enduring banks for more than a century. For the last five years, its growth and expansion became more apparent with its prudent acquisitions. With the uptrend in its financials in 1Q 2021, one can see its stable and impressive growth that may continue for the next quarters. Despite this, it continues to become more careful, given its conservative handling of loans and deposits to increase its liquidity and efficiency further. Moreover, its net income and FCF remained adequate for its continuous expansion, acquisition, and dividend payments. It remains a stock dividend with its substantial dividend growth and the capacity to sustain it. Given this, FMNB continues to show promise when it comes to growth and security.
Meanwhile, the recent changes in the stock price show a generally decreasing pattern for more than three weeks now. Nevertheless, its YTD and six-month trend show a bullish pattern. Also, it remains undervalued, as shown by the price ratios and the Dividend Discount Model. Hence, a long position is recommended for any interested individuals.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.