Business context and reporting period
Farmers National Banc Corp. is an Ohio-based financial holding company operating banking, trust, retirement consulting, and insurance businesses, primarily in northeastern Ohio and parts of Pennsylvania. This Form 10-K covers the fiscal year ended December 31, 2017; financial comparisons below are to 2016 unless noted. The company completed its acquisition of Monitor Bancorp on August 15, 2017.
Key financial results
Amounts are in U.S. dollars; balance-sheet figures are year-end unless stated otherwise.
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets | $2.159 billion | $1.966 billion |
| Total interest and dividend income | $80.5 million | $72.5 million |
| Net interest income | $73.6 million | $68.1 million |
| Provision for loan losses | $3.35 million | $3.87 million |
| Noninterest income | $24.1 million | $23.2 million |
| Noninterest expense | $61.6 million | $59.5 million |
| Net income | $22.7 million | $20.6 million |
| Diluted EPS | $0.82 | $0.76 |
| Net interest margin | 3.99% | 4.01% |
| Efficiency ratio | 59.66% | 61.59% |
| Return on average assets / equity | 1.09% / 9.92% | 1.07% / 9.72% |
| Net loans | $1.565 billion | $1.417 billion |
| Deposits | $1.605 billion | $1.525 billion |
| Short-term / long-term borrowings | $289.6 million / $7.0 million | $198.5 million / $15.0 million |
| Stockholders’ equity | $242.1 million | $213.2 million |
Cash flow: Operating activities provided $30.6 million; investing activities used $137.1 million; financing activities provided $122.4 million. Cash and cash equivalents rose $15.8 million to $57.6 million. Loan growth outpaced deposit growth, contributing to a $91.1 million increase in short-term borrowings.
Material changes versus 2016
- Net income increased 10.5%; diluted EPS rose from $0.76 to $0.82. Results include a $1.8 million charge to remeasure net deferred tax assets following federal tax reform. Excluding that charge and acquisition-related expenses, management reported adjusted net income of $24.8 million and diluted EPS of $0.90; these are non-GAAP measures.
- Net interest income increased 8.1% on a GAAP basis. Higher average loan balances supported income, while the cost of interest-bearing liabilities rose to 0.47% from 0.32%; the net interest margin edged down from 4.01%.
- Loans grew 10.5% year over year, with commercial real estate, agricultural, residential real estate, and commercial lending among the growth areas. Monitor’s acquisition added assets, loans, deposits, and shares; reported growth also reflects organic expansion.
- Noninterest income rose 3.5%, including higher insurance commissions, mortgage-sale gains, and debit-card fees. Noninterest expense increased 3.6%; salary and benefit costs rose, partly offset by lower other operating expenses.
- Credit metrics improved overall: nonperforming loans declined to $7.7 million from $8.2 million, or 0.49% of loans from 0.57%; net charge-offs fell to $1.9 million from $2.0 million. The allowance increased to $12.3 million from $10.9 million.
- Cash dividends paid per share increased to $0.22 from $0.16.
Outlook, commentary, risks, and unusual items
- Management projected a 2018 effective tax rate of approximately 15%–19% and expected various noninterest income sources to grow; these are expectations, not a formal earnings or revenue forecast.
- Management said liquidity was more than adequate. Core deposits were 96.4% of total deposits; the Bank had about $60 million of additional FHLB borrowing capacity and $123.7 million of unpledged securities. FHLB advances outstanding were $219.8 million.
- The Bank was categorized as well capitalized. At year-end, its common equity Tier 1, total risk-based capital, Tier 1 risk-based capital, and leverage ratios were 11.45%, 12.19%, 11.45%, and 9.12%, respectively. The filing states that dividend and other capital distributions remain subject to regulatory limits.
- Interest-rate simulation showed that a 300-basis-point increase would reduce modeled net interest income by 1.9% and net present value of equity by 7.5%; a 100-basis-point decrease would reduce them by 3.3% and 7.2%, respectively. Management said results were within policy limits.
- Key exposures include real estate concentration (approximately 62.2% of loans by the risk-factor discussion), local economic conditions, indirect auto lending, credit-loss estimation, rising deposit costs, and reliance on wholesale funding. The filing also discusses acquisition integration, competition, cybersecurity and operational risk, regulatory change, and environmental and legal contingencies.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21% from 35% beginning in 2018, prompting the $1.8 million deferred-tax-asset write-down in 2017. The company also reported a $364,000 reduction in the remaining Bowers contingent-payment liability, recorded as a reduction of acquisition-related costs.
- Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2017. The auditor issued unqualified opinions on the financial statements and internal control. Management said pending and threatened legal matters were not expected to have a material adverse effect overall, while noting an unfavorable resolution could affect a particular future period.
Important facts for investors to verify
- Reconcile reported 2017 EPS of $0.82 with management’s adjusted $0.90, including the tax-reform charge and the definition and tax treatment of acquisition-related adjustments.
- Assess Monitor acquisition purchase accounting, integration progress, expected synergies, and the portion of balance-sheet growth attributable to the acquisition versus organic growth.
- Monitor loan quality by category, particularly residential and consumer delinquencies, real-estate concentration, indirect auto losses, and the adequacy of the allowance as lending expands.
- Track funding costs and liquidity as loan growth exceeds deposit growth and short-term borrowings rise; review the maturity and renewal profile of FHLB advances and repurchase agreements.
- Check the effect of interest-rate changes on net interest margin, and confirm that reported sensitivity assumptions remain relevant as deposit pricing and asset yields change.
- Verify regulatory capital headroom, dividend capacity, and the effects of applicable capital-buffer requirements and future credit-loss accounting changes.