Farmers National Banc Corp. — Q2 2019 Form 10-Q
Business context and reporting period
Farmers National Banc Corp. is an Ohio-based financial holding company providing banking and related trust, retirement consulting, and insurance services, primarily in northeastern Ohio and western Pennsylvania. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $8.54 million; diluted EPS $0.31 | Q2 2018: $8.07 million; $0.29 |
| Six-month net income and diluted EPS | $16.93 million; $0.61 | H1 2018: $15.80 million; $0.57 |
| Net interest income | Q2: $20.49 million; H1: $40.46 million | Q2 2018: $19.56 million; H1 2018: $38.51 million |
| Net interest margin | Q2: 3.84%; H1: 3.83% | Q2 2018: 3.93%; H1 2018: 3.92% |
| Noninterest income / expense | Q2: $6.99 million / $16.70 million; H1: $13.51 million / $32.68 million | Q2 2018: $6.31 million / $15.46 million; H1 2018: $12.32 million / $30.55 million |
| Assets / loans / deposits | $2.406 billion / $1.781 billion / $2.001 billion | December 31, 2018: $2.329 billion / $1.736 billion / $1.800 billion |
| Cash and cash equivalents | $64.0 million | December 31, 2018: $57.9 million |
| Borrowings | $97.0 million total; $91.3 million short-term | December 31, 2018: $250.8 million total; $244.8 million short-term |
| Stockholders’ equity | $284.8 million; book value $10.26 per share | December 31, 2018: $262.3 million; book value $9.44 per share |
Q2 return on average assets was 1.45% and return on average equity was 12.34%, versus 1.47% and 13.28% in Q2 2018. The Q2 tax-equivalent efficiency ratio was 58.3%, compared with 57.3%. The effective tax rate was 14.8%, compared with 16.4%.
For the six months, operating cash flow was $14.6 million, investing cash outflow was $49.2 million, and financing cash inflow was $40.7 million. Cash and equivalents increased $6.1 million. The Bank’s June 30 regulatory ratios included 12.47% consolidated common equity tier 1, 13.34% total risk-based capital, and a 10.27% tier 1 leverage ratio. The Bank was reported well-capitalized.
Material changes versus comparable periods
- Q2 net income rose approximately 5.8% year over year; H1 net income rose approximately 7.2%. Diluted EPS increased from $0.29 to $0.31 for Q2 and from $0.57 to $0.61 for H1.
- Net interest income increased, but margin declined 9 basis points in both the quarter and half-year. Management attributed margin pressure chiefly to higher deposit and borrowing costs: interest-bearing liability costs rose faster than asset yields.
- Q2 noninterest income rose 10.9%, helped by mortgage-loan sale gains, trust fees, and deposit service charges. Noninterest expense increased, including $505,000 of unusual legal-contingency expense.
- Loans increased $44.7 million from year-end, a 5.1% annualized growth rate. Deposits rose $200.9 million, including a $110 million increase in brokered time deposits; short-term borrowings fell as the Company used deposits to repay FHLB advances.
- Equity increased $22.5 million, reflecting earnings and a $11.9 million after-tax H1 gain in other comprehensive income, primarily from improved fair values of available-for-sale securities.
- Asset-quality measures improved year over year: nonperforming loans were 0.41% of loans versus 0.51%, and nonperforming assets were 0.30% of assets versus 0.38%. Q2 net charge-offs were $305,000 versus $536,000.
Outlook, commentary, risks, and unusual items
- Management gave no specific earnings or revenue guidance. It expects cash and equivalents to decline toward December 2018 levels over the following months as funds are used for loan growth and securities purchases, and intends to maintain the securities portfolio at roughly its current proportion of assets.
- Management described liquidity and the allowance for loan losses as adequate. Available liquidity sources include a $35 million unused bank line, approximately $473.9 million of additional FHLB borrowing capacity, and access to the Federal Reserve discount window.
- Interest-rate risk is a key exposure. Modeling showed net interest income down 3.6% under a 100-basis-point rate decline. The modeled net present value of equity fell 27.3% in that scenario, beyond the Company’s -10% policy guideline; management said it would continue monitoring the exception. The Company described its balance sheet as slightly asset-sensitive.
- The Company accrued $505,000 in Q2 for a pending legal settlement and expects insurance recovery, but recorded no recovery asset. The amount is included in expenses and management does not expect the expense to recur in future quarters.
- Unused loan commitments totaled $419.4 million at June 30, 2019, versus $339.4 million at year-end. The filing notes ordinary-course litigation and other contingencies.
- The Company plans to adopt the expected-credit-loss standard (CECL) on January 1, 2020; management had not determined its full financial-statement impact. Adoption of lease accounting in January 2019 recognized a $3.4 million right-of-use asset and related liability, with no initial income-statement effect.
- On July 1, Trust acquired NAI from the parent in a corporate reorganization; the entities are to report as one segment beginning in Q3. The expected efficiency savings were described as not material and could not be estimated.
- On July 30, after quarter-end, the Board authorized a new repurchase program for up to 1.5 million shares, replacing the prior authorization. The program may be modified, suspended, or ended at any time.
Important facts for investors to verify
- Whether deposit pricing and funding mix—particularly brokered time deposits—continue to support loan growth without further net interest margin compression.
- Trends in loan delinquencies, nonperforming assets, charge-offs, criticized loans, and reserve coverage as the portfolio grows.
- The status and ultimate cost of the pending legal settlement, including whether the expected insurance recovery is received.
- How management addresses the modeled net-present-value-of-equity sensitivity that exceeds its policy guideline under falling rates.
- The eventual CECL adoption impact, and whether the post-quarter share repurchase changes capital or liquidity priorities.