Farmers National Banc Corp. — Q1 2019 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2019, with comparisons to Q1 2018 for operating results and December 31, 2018 for balance-sheet amounts. Farmers is an Ohio-based financial holding company serving northeastern Ohio through banking, trust, retirement consulting, and insurance businesses. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $20.0 | $18.9 in Q1 2018 |
| Noninterest income | $6.5 | $6.0 in Q1 2018 |
| Net income; diluted EPS | $8.4; $0.30 | $7.7; $0.28 in Q1 2018 |
| Net interest margin | 3.81% | 3.92% in Q1 2018 |
| Total assets | $2,356.1 | $2,328.9 at Dec. 31, 2018 |
| Gross loans; net loans | $1,743.7; $1,729.9 | $1,735.8; $1,722.2 at Dec. 31, 2018 |
| Deposits | $1,954.3 | $1,799.7 at Dec. 31, 2018 |
| Cash and cash equivalents | $69.7 | $57.9 at Dec. 31, 2018 |
| Stockholders’ equity | $273.0 | $262.3 at Dec. 31, 2018 |
- Interest and dividend income was $24.7 million versus $21.3 million in Q1 2018; interest expense rose to $4.7 million from $2.3 million. The loan yield increase was partly offset by higher funding costs.
- Provision for loan losses was $0.55 million, down from $0.78 million. Noninterest expense increased to $16.0 million from $15.1 million, led by higher salaries and employee benefits.
- Operating cash flow was $5.2 million, investing cash use was $3.9 million, and financing cash provided was $10.5 million. Cash increased $11.7 million during the quarter.
- Short-term borrowings were $103.5 million and long-term borrowings $5.9 million at quarter-end, compared with $244.8 million and $6.0 million, respectively, at year-end. The filing reports $100 million of short-term FHLB advances at March 31, 2019.
- Annualized return on average assets was 1.45%; return on average equity was 12.71%, versus 13.03% in Q1 2018. The efficiency ratio improved to 57.83% from 57.98%.
- Regulatory capital ratios included a 12.37% consolidated common equity tier 1 ratio, 13.24% total risk-based capital ratio, and 10.07% tier 1 leverage ratio. Management said the Company and Bank met capital requirements; the Bank was categorized as well capitalized.
Material changes versus comparable periods
- Net income rose about 8.6% year over year and diluted EPS increased from $0.28 to $0.30. Net interest income increased about 5.4% and noninterest income about 8.5%.
- Net interest margin declined 11 basis points: asset yields increased 29 basis points, while the cost of interest-bearing liabilities rose 54 basis points. Management attributed margin pressure mainly to competitive deposit pricing.
- Loans grew $7.8 million from year-end. Deposits increased $154.6 million, including a $75 million increase in brokered time deposits and approximately $56 million in public funds deposits. The Company used deposit growth to repay about $150 million of short-term FHLB advances.
- Nonperforming loans were $7.6 million, or 0.43% of loans, versus $7.9 million, or 0.49%, in Q1 2018. Net charge-offs were $0.365 million, compared with $0.540 million; early-stage delinquencies increased to 0.52% of loans from 0.44%.
- Other comprehensive income was $4.6 million, compared with a $7.0 million loss in Q1 2018, mainly reflecting improved fair values of available-for-sale securities.
Outlook, commentary, and risks
- Management described loan growth as a priority, with stated emphasis on sound underwriting. It expected cash and cash equivalents to decline toward year-end levels over the following months as funds were used for loan growth and securities purchases, and intended to maintain the securities portfolio near its existing share of assets.
- Management considered liquidity adequate. It cited cash and liquid assets, deposit gathering, FHLB borrowing capacity of approximately $451.9 million, access to the Federal Reserve Discount Window, and other bank credit lines. Total unused customer commitments were $343.3 million at quarter-end; these are contingent exposures, not necessarily future cash requirements.
- Interest-rate risk is a key exposure. The Company described its balance sheet as slightly asset sensitive. Simulations showed net interest income down 3.7% under a 100-basis-point rate decline; modeled changes in the net present value of equity exceeded internal policy limits in all scenarios shown for March 31, 2019. Management said it would continue monitoring the policy exceptions.
- Credit quality and the allowance depend on management estimates and economic conditions. Management considered the $13.8 million allowance adequate. Adoption of the expected-credit-loss standard (ASU 2016-13) was planned for January 1, 2020, but its full financial impact had not been determined.
- The Company adopted lease accounting on January 1, 2019, recording a $3.6 million right-of-use asset and corresponding liability at adoption; the reported balance was $3.5 million at March 31.
- The filing provides no specific earnings or financial-performance guidance. It cautions that forward-looking statements are subject to uncertainty and that actual results may differ. The Company reported ordinary-course lawsuits; no material risk-factor changes from its 2018 Form 10-K were reported.
Most important facts for investors to verify
- Whether loan and deposit growth can be sustained without further margin pressure, particularly as deposit costs rise and brokered deposits form part of funding.
- Whether the modeled net-present-value-of-equity policy exceptions, especially under falling rates, lead to changes in asset-liability management or actual results.
- Whether early-stage delinquencies, classified loans, and the allowance remain consistent with management’s assessment of credit risk.
- The eventual impact of CECL adoption in 2020 and any material changes in allowance methodology or estimates.
- Liquidity and contingent exposures: confirm the availability and terms of borrowing lines and monitor the $343.3 million of unused commitments.
- Progress on earnings drivers and expenses, including loan yields, funding costs, employee costs, and noninterest income; also distinguish reported net income from the significant quarter-to-quarter effect of securities-related OCI.