Farmers National Banc Corp.: A Big Winning Trade, Mixed Q4 Results

Summary

• A trade was outlined for public consumption in October, returning 25%.
• Q4 metrics for the bank were mixed, with deposits declining slightly but loan growth and revenues increasing.
• The bank has strong asset quality and profitability, but there are concerns about the impact of the current economy on customers.
• Embrace the house-position approach and collect income.
• Looking for more investing ideas like this one? Get them exclusively at BAD BEAT Investing. Learn More »

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Back in October, we outlined a very clear trade on Farmers National Banc Corp. (NASDAQ:FMNB). We showed you the entries and rate shares as a buy for a trade and to collect income. The target exit was hit, and one of the things that we like to teach in our investing group is rolling trading gains into a so-called house position.

FMNB stock is an ideal candidate for this given its high dividend yield. The concept is simple. You have some 25%+ gains, so you back out the initial investment, plus some of the profit to buy yourself something nice, and leave profit in the stock to continue running, collecting all future gains, dividends, and spinoffs. Here is the deal. We now rate shares a hold here but do see the upside. But we would not 'buy' until there is another pullback. We like what we see on the key metrics, though there is a mixed nature in the asset quality and return metrics, but long term, you can hang on here. And, you are paid a healthy dividend to wait. Let us discuss the recent performance.

Discussion

The bank's just-reported earnings show key trends and metrics were mixed in Q4. Long term, this bank has a strong track record of profitability and growth, and remains well-capitalized. Farmers National Banc Corp. 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 and had its 164th consecutive quarter of profitability.

In Q4, Farmers National Banc Corp. saw deposits decline slightly from Q3, but remain up since the start of the year following the acquisition of Emclaire Financial. Total deposits at Q4 end was $2.18 billion, dipping from $4.26 billion to start the quarter. That said, the company grew its loan portfolio from the sequential Q3. Loan growth was $29.6 million in the quarter, or 3.7% annualized. Revenues rose in Q4 by $1 million from Q3, with Farmers National bringing in $45 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 quarter, loan loss provisions were $286,000, spiking from $243,000 in Q3, but down from $416,000 last year. This is positive. Net interest margins in our opinion are at a bottom in this rate environment. However, margins narrowed from Q3. The net interest margin was 2.78% for Q4 2023, falling from 2.86% in Q3 2023. It was also down from 2.99% for Q4 2022. Overall, the bank saw a net interest income of $32.8 million in Q4 2023 compared to $33.8 million in the sequential quarter. It was up from $29.8 million last year, but Farmers National had more earning assets in 2023 due to the acquisition of Emclaire. Total EPS for Q4 was $0.41.

On these metrics, it was a mixed quarter for Farmers National Banc Corp., driven by the margin compression, while noninterest and fee income continues to be mixed given the economy, with some lower demand for certain loan products, but overall resilient. Still, we like the loan growth.

We also like holding a house position because Farmers National Banc Corp. still has industry-leading asset quality. However, the bank is not impervious to asset quality hits given the customer pressures in this economy. The good news is that non-performing loans improved from the sequential Q3, coming in at $15.1 million from $18.4 million. In this climate, not seeing further non-performing loans is positive. The non-performing loan to total loans ratio was 0.47%, down from the start of the year's 0.62%, and down from 0.58% Q3. Non-performing assets to total assets improved to 0.30% from 0.37% last quarter, which is strong. However, early-stage delinquencies ticked up to $16.7 million or 0.52% of loans, rising from $13.3 million or 0.42% of loans in Q3. So this was mixed

Farmers National saw an efficiency ratio of 57.84%, an improvement from 60.11% in Q3. However, a year ago this metric was 52.5%, and the tick-up in the metric is a direct result of the margin pressures overall this year. That said, the return on average assets jumped from Q3, which is another positive. The return on average assets improved to 1.17% vs. 1.06% to start the quarter, while the return on average equity came in at 17.98% vs 14.49% in the sequential Q3.

Take home

There remains a bountiful yield here with Farmers National Banc Corp. The market has been on fire and has taken this trade to a big win. It is wise to consider taking out the initial investment and running a house position forever and ever collecting all future gains, dividends, spin-offs, etc., all on profit. The initial investment can then be rolled into one of several high-conviction ideas we have.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FMNB either through stock ownership, options, or other derivatives. 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.