Farmers National Banc Corp. — Q3 2015 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2015. Farmers is an Ohio bank holding company with banking, trust, retirement consulting, and insurance operations. On June 19, 2015, it acquired National Bancshares Corporation (NBOH), adding First National Bank of Orrville; the acquisition materially affects comparisons. A separate acquisition of Tri-State 1st Banc closed October 1, 2015, after quarter-end, and is not included in these financial statements.
Key financial results
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $14.54 | $9.29 | $33.28 | $27.09 |
| Noninterest income | $4.69 | $3.88 | $13.13 | $11.11 |
| Net income | $1.86 | $2.28 | $4.88 | $6.82 |
| Diluted EPS | $0.07 | $0.12 | $0.23 | $0.36 |
| Net interest margin | 3.84% | 3.58% | 3.72% | 3.57% |
| Efficiency ratio | 76.55% | 70.17% | 76.27% | 69.91% |
- Q3 operating income, calculated as net interest income plus noninterest income, was $19.22 million versus $13.17 million a year earlier. Nine-month operating income was $46.41 million versus $38.20 million.
- Q3 provision for loan losses was $1.22 million, up from $0.43 million; nine-month provision was $2.52 million versus $1.06 million. Q3 noninterest expense rose to $15.52 million from $9.78 million, including $2.50 million of merger costs.
- Management attributed the lower reported earnings to acquisition-related expenses. It reported adjusted Q3 net income of $3.7 million, or $0.15 per diluted share, excluding after-tax acquisition expenses; adjusted nine-month net income was $8.4 million, or $0.40 per share. These are management adjustments, not GAAP results.
- Q3 annualized return on average assets and equity were 0.43% and 3.97%; excluding after-tax acquisition expenses, management reported 0.87% and 7.97%. Nine-month reported returns were 0.48% and 4.31%, respectively.
Financial position, cash flow, and material changes
- At September 30, 2015, total assets were $1.708 billion, net loans $1.175 billion, deposits $1.330 billion, total borrowings $179.7 million, and stockholders’ equity $186.2 million. Cash and cash equivalents were $34.3 million. These balance-sheet amounts compare with December 31, 2014, and include NBOH.
- Gross loans increased $519.2 million from year-end, including approximately $430.5 million from NBOH and $88.7 million of organic growth. Deposits rose $414.5 million, primarily due to $423.7 million assumed in the acquisition. Assets increased about $571 million from year-end.
- Q3 net interest margin improved 26 basis points year over year. Management cited lower deposit costs, a higher loan share of earning assets, and accretion from acquired discounted loans. Nine-month net interest margin was 3.72%.
- Noninterest income rose year over year, reflecting increased deposit fees, mortgage loan-sale gains, insurance commissions, and acquisition-related business volume. Management reported a 61.94% Q3 efficiency ratio excluding acquisition costs, versus 70.17% a year earlier.
- For the first nine months, operating cash flow was $7.3 million, investing cash flow was negative $16.1 million, financing cash flow was positive $15.7 million, and cash increased $6.9 million. Loan originations and payments used $91.7 million net; acquisition cash received was $21.3 million. Net deposit cash flows were negative $9.1 million, excluding acquisition balance-sheet effects.
- Book value per share was $7.25, while tangible book value per share was $5.72. The filing reported a tangible common equity ratio of 8.80%, versus 9.88% at September 30, 2014; acquisition-related goodwill and intangibles affected the tangible measure.
Credit, liquidity, capital, outlook, and risks
- Nonperforming loans were $9.62 million, or 0.81% of loans; nonperforming assets were $10.67 million, or 0.62% of assets. The allowance for loan losses was $8.29 million, 0.70% of loans and 86.22% of nonperforming loans. Management considered the allowance adequate. Q3 net charge-offs were $211,000; the provision reflected loan growth and charge-offs associated with one owner-occupied commercial real estate relationship.
- Reported liquidity sources included $34.3 million in cash and cash equivalents, $39.0 million of unused bank lines, approximately $135 million of additional FHLB borrowing capacity, and access to the Federal Reserve Discount Window. Management said liquidity was adequate. Core deposits were approximately 96.7% of deposits.
- The Bank was classified as well capitalized. At September 30, the consolidated common equity tier 1 ratio was 12.24%, total risk-based capital ratio 12.87%, and tier 1 leverage ratio 9.59%. The company noted Basel III requirements and the phase-in of the capital conservation buffer.
- No specific earnings or margin guidance was provided. Management said both acquisitions offer opportunities to expand markets and pursue scale efficiencies. Tri-State, which had approximately $139 million in assets at closing, will be reflected in fourth-quarter results.
- Key exposures include economic and credit conditions, banking competition and regulation, loan demand, changing interest rates, technology, and deposit retention. Management described the balance sheet as liability-sensitive and identified interest-rate risk as its primary market exposure. In modeled scenarios, a 100-basis-point rate decline reduced net interest income 3.8%; a 300-basis-point increase raised it 3.3%.
- Unusual items include $4.66 million of nine-month merger-related costs and a $1.3 million nine-month expense for contingent consideration from the earlier NAI acquisition; the latter was not tax deductible. Management reported no material legal proceedings or material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported and adjusted earnings growth or decline reflects recurring operations versus merger costs, NAI contingent consideration, and acquired-loan accretion.
- Integration progress, realized cost savings, and final purchase accounting and fair values for NBOH; also the fourth-quarter contribution and integration costs of the October Tri-State acquisition.
- Credit trends in acquired and organic loans, including the growth in nonperforming loans, commercial real estate exposures, charge-offs, and allowance coverage.
- Whether deposit retention, borrowing levels, and loan growth remain sustainable, and how interest-rate changes affect margins and funding costs.
- Capital and tangible book value after acquisition-related goodwill and intangibles, and the effect of Basel III capital-buffer requirements on dividends and growth.