Farmers National Banc Corp. — Q1 2016 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2016. Farmers National Banc Corp. is an Ohio bank holding company with banking, trust, insurance and retirement-consulting operations. Results include the 2015 acquisitions of First National Bank of Orrville and Tri-State’s First National Community Bank; the prior-year comparison therefore reflects a substantially smaller company.
Financial performance and position
- Income and earnings: Interest and dividend income was $17.7 million, versus $10.0 million in Q1 2015. Net interest income was $16.7 million, compared with $9.0 million; noninterest income was $4.9 million, up from $4.0 million. Net income rose to $4.8 million from $2.2 million, and diluted EPS increased to $0.18 from $0.12. Management said adjusted net income excluding after-tax acquisition-related expenses was $5.0 million, or $0.19 per diluted share.
- Margins and returns: Net interest margin was 4.07%, compared with 3.64% a year earlier; management attributed the increase partly to acquired-loan discount accretion and a greater loan mix. Excluding specified premium amortization and loan-discount accretion, management reported a 3.98% margin. Annualized ROA was 1.03% versus 0.79%, and ROE was 9.41% versus 7.14%. The efficiency ratio improved to 62.7% from 70.7%.
- Balance sheet: Total assets were $1.860 billion at March 31, 2016, down from $1.870 billion at year-end. Loans were $1.316 billion, up from $1.297 billion at year-end; deposits were $1.446 billion, up from $1.409 billion. Stockholders’ equity was $204.0 million, compared with $198.0 million.
- Cash flow and liquidity: Operating cash flow was $2.5 million, versus $0.9 million in Q1 2015; investing activities used $9.1 million, versus providing $12.7 million; financing activities used $14.8 million, versus $14.0 million. Cash and cash equivalents declined $21.4 million to $34.6 million. Management said liquidity was adequate; the Bank had $25 million in credit lines, of which $5.5 million was drawn, and approximately $161.7 million of additional FHLB borrowing capacity.
- Borrowings and capital: Total short- and long-term borrowings were $197.6 million, down from $248.0 million at year-end, largely after repaying short-term FHLB advances. The Bank was categorized as well capitalized. At March 31, consolidated common equity tier 1, total risk-based capital, tier 1 risk-based capital and tier 1 leverage ratios were 11.82%, 12.63%, 11.97% and 9.34%, respectively.
Material changes and asset quality
- Compared with Q1 2015, total assets increased from $1.134 billion to $1.860 billion, and loans rose from $673.8 million to $1.316 billion, reflecting the acquisitions as well as management-reported 22% organic loan growth over the prior 12 months. Management stated that the two acquisitions added $496 million of loans.
- Noninterest expense increased to $14.4 million from $9.8 million, mainly reflecting the larger post-acquisition business and added employees. Q1 2016 included $289,000 of merger-related costs. Management reported 424 full-time equivalents at quarter-end and said it reduced staffing by five positions late in the quarter.
- The loan-loss provision was $780,000, versus $450,000 a year earlier; management attributed the increase primarily to organic loan growth. Net charge-offs were $368,000, compared with $359,000.
- Nonperforming loans were $9.7 million, or 0.74% of loans, versus 1.18% a year earlier. Nonperforming assets were $10.3 million, or 0.55% of assets. The allowance was 0.71% of total loans; excluding acquired loans, management reported 1.08%. Acquired loans were recorded at fair value without an associated allowance at acquisition.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Management expected cash levels to remain steady over the following few months and said the net interest margin should maintain current levels in the near term, while describing the balance sheet as liability-sensitive in the prevailing low-rate environment.
- Key stated risks include economic and credit conditions in the company’s markets, banking-industry and regulatory changes, interest-rate movements, loan demand, technology, competition and pricing pressures. Management identifies the allowance for loan losses, securities impairment and goodwill impairment as areas requiring significant judgment.
- Available-for-sale securities recorded $2.2 million of after-tax unrealized gains in other comprehensive income during the quarter. Management attributed fair-value changes to normal market interest-rate fluctuations and did not consider the disclosed unrealized losses to be other-than-temporary impairments.
- The company reported $8.8 million of troubled debt restructurings at March 31, 2016. Management said no outstanding legal actions were expected to have a material adverse effect and reported no material changes to the prior-year risk factors.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the year-over-year earnings and loan growth reflects the 2015 acquisitions versus sustainable organic growth, and how the acquired businesses are progressing toward planned cost savings.
- The sustainability of the 4.07% net interest margin, including the impact of acquired-loan discount accretion, deposit pricing and changes in market interest rates.
- Credit trends, allowance adequacy and acquired-loan performance, including nonperforming loans, early-stage delinquencies, troubled debt restructurings and charge-offs.
- Liquidity and funding conditions as loan growth continues, including reliance on FHLB advances, repurchase agreements and unused credit lines.
- The effect of acquisition-related expenses and integration efforts on expenses, efficiency and future earnings; also confirm management’s adjusted earnings calculation against the reported statements.
- Potential interest-rate sensitivity: the filing’s simulation estimated net interest income would decline 3.0% under a 100-basis-point rate decrease, while net present value of equity would decline 6.6% in that scenario.