Farmers National Banc Corp. — 2013 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2013. Farmers National Banc Corp. is an Ohio bank holding company operating banking, trust, insurance and retirement-plan consulting businesses, principally in northeastern Ohio. Its 2013 results include National Associates, Inc. (NAI), acquired July 1, 2013. The company reported three segments: Bank, Trust and retirement consulting.
Key financial metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income | $35.9 million | $36.9 million |
| Noninterest income | $13.9 million | $12.6 million |
| Net income | $7.8 million | $9.9 million |
| Diluted earnings per share | $0.41 | $0.53 |
| Return on average assets / equity | 0.68% / 6.66% | 0.89% / 8.42% |
| Net interest margin | 3.58% | 3.76% |
| Total assets | $1.137 billion | $1.140 billion |
| Total loans / deposits | $630.7 million / $915.2 million | $586.6 million / $919.0 million |
| Total stockholders’ equity | $113.0 million | $120.8 million |
Operating cash flow was $14.3 million; investing activities used $28.0 million and financing activities provided $3.5 million. Cash and cash equivalents ended the year at $27.5 million, down from $37.8 million. Total short- and long-term borrowings were $101.4 million, versus $90.3 million in 2012. Management reported $268 million of unpledged investment securities, $84.6 million of additional FHLB borrowing capacity, and $6 million drawn on bank credit lines at year-end; the latter was repaid in January 2014.
The allowance for loan losses was $7.6 million, or 1.20% of loans. Nonperforming loans were $9.1 million (1.44% of loans), compared with $8.2 million (1.40%) in 2012; allowance coverage of nonperforming loans declined to 83.25% from 93.01%. The Bank was classified as well capitalized: total risk-based capital was 15.42%, Tier 1 risk-based capital 14.35%, and Tier 1 leverage 8.93% at year-end.
Material changes versus the prior comparable period
- Net income fell 21.7%; management attributed pressure primarily to lower asset yields and higher expenses. Average loan balances grew 5.4%, but loan yield declined to 5.24% from 5.71%; net interest margin fell 18 basis points.
- Noninterest income increased $1.3 million, including new NAI consulting fees, higher deposit service charges, insurance commissions and bank-owned life insurance income. Securities gains declined to $863,000 from $1.1 million.
- Noninterest expense rose 9.2% to $39.1 million. Salary and benefit expense included $1.3 million of severance costs, mainly related to the departure of the President and CEO. NAI-related amortization and merger costs also increased.
- Loans grew 7.5%, led by commercial real estate, residential real estate and indirect consumer lending. Net charge-offs declined to $1.35 million from $2.92 million, but consumer loan charge-offs increased.
- Equity fell 6.4%, mainly reflecting a $13.1 million after-tax reduction in accumulated other comprehensive income as available-for-sale securities shifted from unrealized gains to losses. Tangible book value per share declined to $5.47 from $6.11.
- Core deposits represented 90.6% of deposits. Year-end deposits were slightly lower, while average deposits increased, according to management.
Outlook, risks, contingencies and unusual items
The filing provides no numerical earnings or revenue guidance. Management said it would continue monitoring rates and deposit pricing, pursue growth and diversify revenue, and control expenses. It cited planned synergies and cost savings from NAI, but NAI contributed $627,000 of revenue and a $156,000 net loss during its six months in 2013. Up to $1.5 million of acquisition consideration is contingent on performance targets; its acquisition-date fair value was $920,000.
Key risks include local economic weakness, real estate concentration and collateral values, credit losses in indirect auto lending, interest-rate movements, competition, liquidity and regulatory changes. Commercial and residential real estate loans together were about 61.4% of the loan portfolio. In the company’s interest-rate simulations, a 300-basis-point increase reduced modeled net interest income by 3.3% and net present value of equity by 8.7%; a 100-basis-point decrease reduced modeled equity value by 11.2%, exceeding an internal policy limit. Management considered such a rate decline unrealistic in the prevailing environment.
Available-for-sale securities had $12.0 million of gross unrealized losses at year-end, compared with $870,000 in 2012. Management said the losses were principally rate- and liquidity-related rather than credit-related and did not consider the securities other-than-temporarily impaired, apart from a $3,000 equity-security charge. The company closed two branches in October 2013 and repurchased 247,845 shares for $1.6 million. The fourth-quarter 2013 net income was $2.3 million, versus $2.6 million in fourth-quarter 2012; fourth-quarter provision for loan losses was $525,000, versus none a year earlier.
Management stated pending and threatened legal matters were not expected to have a material adverse effect, while noting an unfavorable resolution could materially affect a particular future period. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported effective controls.
Important facts for investors to verify
- Whether credit quality, especially commercial, residential and consumer exposures, supports the allowance and its reduced coverage of nonperforming loans.
- Whether NAI meets earnout targets and achieves the expected integration benefits, given its reported post-acquisition net loss.
- How securities valuation changes, interest rates and the resulting accumulated other comprehensive income affect equity and capital.
- Whether net interest margin stabilizes and expense growth moderates after severance, acquisition costs and branch closures.
- Current liquidity, borrowing availability and regulatory capital after the year-end balance-sheet and market-value changes.