Farmers National Banc Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless otherwise stated. The company provides banking, trust, retirement consulting and insurance services, primarily in northeastern Ohio.
Business context and reporting period
Results reflect acquisitions that complicate year-over-year comparisons: NBOH was acquired in June 2015, Tri-State in October 2015, and Bowers Insurance Agency on June 1, 2016. Bowers consideration totaled approximately $3.2 million, including contingent payments; the company recorded $1.8 million of goodwill. It also formed a wholly owned insurance captive in Q3 2016.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $17.2 | $14.5 | $50.8 | $33.3 |
| Noninterest income | $6.5 | $4.7 | $17.2 | $13.1 |
| Net income | $5.4 | $1.9 | $15.2 | $4.9 |
| Diluted EPS | $0.20 | $0.07 | $0.56 | $0.23 |
| Net interest margin, tax-equivalent | 3.97% | 3.84% | 4.04% | 3.72% |
| Efficiency ratio, tax-equivalent | 60.85% | 76.55% | 62.00% | 76.27% |
For the nine months, operating cash flow was $13.8 million, investing cash outflow was $69.9 million and financing cash inflow was $67.4 million. Cash and cash equivalents ended at $67.4 million, up from $56.0 million at December 31, 2015.
At September 30, total assets were $1.961 billion, loans $1.396 billion, deposits $1.492 billion and stockholders’ equity $215.4 million. Loans grew $98.8 million and deposits rose $83.1 million from year-end 2015. Total borrowings were $235.8 million, down from $247.9 million. Loans-to-deposits were 93.53%, versus 88.93% at September 30, 2015.
Credit measures included an allowance for loan losses of $10.5 million, or 0.75% of loans; nonperforming loans of $8.0 million, or 0.57% of loans; and nonperforming assets of $8.5 million, or 0.43% of assets. Early-stage delinquent loans (30–89 days) were $11.0 million, or 0.79% of loans. Net charge-offs were $312,000 for the quarter; the annualized net charge-off rate was 0.09%.
At September 30, the company’s common equity tier 1, total risk-based capital, tier 1 risk-based capital and tier 1 leverage ratios were 11.67%, 12.51%, 11.81% and 9.35%, respectively. Management said the company and bank met applicable capital requirements; the bank was classified as well capitalized. Cash dividends were $0.04 per share in each of the first three quarters, up from $0.03 per quarter in 2015.
Material changes versus comparable periods
- Reported earnings increased substantially: Q3 net income rose to $5.4 million from $1.9 million; nine-month net income rose to $15.2 million from $4.9 million. Comparisons are affected by the timing of 2015 acquisitions and related merger costs.
- Management’s non-GAAP results excluding acquisition costs were Q3 net income of $5.4 million versus $3.7 million, and nine-month net income of $15.6 million versus $8.6 million. These measures are not substitutes for GAAP results.
- Quarterly noninterest income increased 38.4%, driven in part by Bowers insurance commissions, mortgage loan-sale gains, deposit fees and debit card fees. Nine-month noninterest income rose to $17.2 million from $13.1 million.
- Nine-month noninterest expense increased to $44.5 million from $37.4 million, including higher salaries, occupancy, core processing and other operating costs. Q3 expense was $15.2 million, slightly below the prior-year $15.5 million, which included $2.5 million of merger costs.
- Loan growth and improved asset mix supported margin expansion. Management attributed part of the increase to acquired-loan discount accretion; excluding specified deposit/FHLB premium amortization and acquired-loan accretion, Q3 margin would have been 3.89% and nine-month margin 3.95%.
Outlook, commentary, risks and unusual items
No specific earnings or financial guidance was provided. Management expected cash levels to remain relatively steady over the next few months and described liquidity as adequate. It cited loan growth, deposit gathering, expense discipline and noninterest-income growth as priorities. The company reported a slightly asset-sensitive balance sheet; simulations showed net interest income increasing 1.8%, 2.9% and 3.7% under +100, +200 and +300 basis-point rate scenarios, but declining 3.6% under a 100-basis-point decrease. The modeled net present value of equity decline under the -100-basis-point scenario was 10.3%, exceeding the internal guideline; management said such a rate decline was not realistic in the prevailing environment.
Risks identified include economic and credit conditions, banking-industry and regulatory developments, interest-rate movements, loan demand, competition, technology and pricing pressure. Total unused customer commitments were $312.9 million; these are off-balance-sheet commitments and are not necessarily future cash requirements. The company also had a $5 million SBIC investment commitment, of which $3.1 million had been funded. Management reported no legal proceedings expected to have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls. The allowance for loan losses, securities impairment judgments and goodwill impairment estimates are significant areas of management judgment. No goodwill impairment was identified at the September 2016 annual test.
The company disclosed adoption planning for new accounting standards, including the expected-credit-loss standard (ASU 2016-13), effective for public-company fiscal years beginning after December 15, 2019; management had not determined its impact. The filing states that lease accounting changes were not expected to have a material impact.
Important facts for investors to verify
- How much of earnings and margin growth is sustainable after separating acquisition timing, merger costs and acquired-loan accretion.
- Whether loan growth, early-stage delinquencies and charge-offs affect future credit costs; monitor the allowance and nonperforming-loan trends.
- Deposit growth, the 93.53% loans-to-deposits ratio, borrowing needs and available liquidity capacity as lending expands.
- Integration and performance of Bowers, including contingent consideration, and realization of expected acquisition synergies and cost efficiencies.
- Interest-rate exposure, especially the modeled equity-value sensitivity to falling rates, and capital ratios as Basel III requirements phase in.
- The scale and potential funding needs of $312.9 million in unused commitments and the remaining SBIC commitment.