Farmers National Banc Corp. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company is an Ohio bank holding company, with banking, trust, insurance, and retirement consulting operations. Unaudited financial statements are presented; amounts below are in millions unless otherwise noted.
Financial results and key metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $9.285 | $8.848 | $27.093 | $26.855 |
| Provision for loan losses | $0.425 | $0.340 | $1.055 | $0.765 |
| Noninterest income | $3.880 | $4.173 | $11.110 | $10.273 |
| Noninterest expense | $9.776 | $10.926 | $28.295 | $29.836 |
| Net income | $2.276 | $1.612 | $6.818 | $5.485 |
| Diluted EPS | $0.12 | $0.09 | $0.36 | $0.29 |
| Net interest margin, tax-equivalent | 3.58% | 3.47% | 3.57% | 3.59% |
| Efficiency ratio, tax-equivalent | 70.17% | 81.64% | 69.91% | 77.21% |
- At September 30, total assets were $1,139.7; loans were $647.0 gross and $639.6 net; available-for-sale securities were $404.9; and cash and cash equivalents were $28.3.
- Deposits were $913.0, down $2.2 from year-end 2013. Short- and long-term borrowings totaled $90.6, down from $101.4 at year-end. Stockholders’ equity was $121.4, or 10.7% of assets.
- For the first nine months, operating cash flow was $8.3, investing cash flow was $8.8, and financing cash flow was negative $16.4; cash and cash equivalents increased $0.8.
- Capital ratios at September 30 were 16.54% total risk-based, 15.52% Tier 1 risk-based, and 9.89% Tier 1 leverage. Management stated the company and bank met applicable capital requirements.
Changes and management commentary
- Q3 net income rose by $0.7 year over year, but management attributed the increase primarily to $1.3 of gross severance costs in Q3 2013. Nine-month net income increased 24.3% (reported EPS growth was 24.1%).
- Nine-month net interest income increased modestly; quarterly margin improved, while the nine-month margin edged down. Management cited improved securities yields and lower deposit costs for the quarterly margin improvement, offset over nine months by lower loan yields.
- Quarterly noninterest income declined because securities gains were $0.001 versus $0.597 in Q3 2013. For nine months, noninterest income rose, including higher trust fees and retirement consulting fees; the latter were $1.392 versus $0.280.
- Nine-month noninterest expense declined 5.2%, mainly due to lower salaries and benefits, including the prior-year severance comparison, and lower merger costs and state and local taxes. The company had closed two branches in Q4 2013.
- Gross loans increased $16.3 from year-end and were 5.8% above September 2013. Nonperforming loans were $7.2, or 1.12% of loans, down from $9.1 and 1.49% a year earlier. However, loans 30–89 days delinquent increased to $4.9 from $2.3 a year earlier. The allowance was $7.3, 1.13% of loans and 101.58% of nonperforming loans.
- Equity increased $8.4 from year-end, including a $4.9 after-tax improvement in securities valuation and $5.1 of retained net income. Other comprehensive income was positive $4.9 after tax for nine months, versus a negative $11.9 in 2013.
Outlook, risks, contingencies, and unusual items
- No specific earnings or financial guidance was provided. Management said it expected cash levels to remain steady over the next few months and considered liquidity adequate.
- Management identified economic and credit conditions, banking-industry and regulatory changes, interest-rate movements, loan demand, competition, technology, and pricing pressure as risks. It is evaluating Basel III requirements effective for the company and bank beginning January 1, 2015, with certain provisions phased in through 2019.
- Interest-rate simulation showed net interest income would change by +2.5% under a 300-basis-point rate increase and -4.1% under a 100-basis-point decrease. The modeled net present value of equity fell 10.8% under a 100-basis-point decline, exceeding the company’s internal guideline; management said it did not consider that decline realistic in the current environment.
- Available-for-sale securities had $5.8 of gross unrealized losses at September 30, including $5.5 on securities in loss positions for at least 12 months. Management did not consider these losses other-than-temporary, citing interest-rate and liquidity factors, issuer credit quality, and no intent or expected requirement to sell before recovery.
- Unused loan commitments totaled $147.4. The company had a $3.0 commitment to an SBIC fund, of which $1.3 was invested. Management reported no material adverse legal proceedings and no material change in risk factors from its 2013 Form 10-K.
- The company repurchased 221,500 shares in Q3 under its existing program at an average $7.72 per share; 698,500 shares remained authorized. A separate odd-lot program was approved, authorizing up to 38,596 shares, with no purchases settled in the quarter.
Important facts for investors to verify
- Whether earnings growth persists after adjusting for prior-year severance costs and securities gains, and whether recurring fee income continues to grow.
- Loan-credit trends, particularly the increase in early-stage delinquencies, provision and net charge-offs, and adequacy of the allowance.
- Interest-rate exposure and the assumptions behind the modeled decline in net present value of equity, as well as potential effects of securities valuation changes on equity.
- Deposit stability, funding costs, borrowing capacity, and liquidity as loan growth continues.
- The effect of Basel III implementation, regulatory costs, and the share repurchase program on capital and future distributions.