Farmers National Banc Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company provides banking, trust, retirement consulting and insurance services, primarily in northeastern Ohio. Financial statements are unaudited; amounts below are in millions except per-share data and ratios.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable / prior date |
|---|---|---|
| Net income; diluted EPS | $5.783; $0.21 | Q1 2016: $4.798; $0.18 |
| Total interest and dividend income | $18.850 | Q1 2016: $17.747 |
| Net interest income | $17.531 | Q1 2016: $16.747 |
| Net interest margin | 4.01% | Q1 2016: 4.07% |
| Noninterest income / expense | $5.887 / $14.613 | Q1 2016: $4.946 / $14.444 |
| Provision for loan losses | $1.050 | Q1 2016: $0.780 |
| Total assets | $2,026.5 | December 31, 2016: $1,966.1 |
| Loans, gross | $1,461.5 | December 31, 2016: $1,427.6 |
| Deposits | $1,540.2 | December 31, 2016: $1,524.8 |
| Cash and cash equivalents | $61.3 | December 31, 2016: $41.8 |
| Borrowings | $245.1 total: $235.2 short-term and $9.8 long-term | December 31, 2016: $213.5 total |
Net income increased about 21% year over year. Return on average assets and return on average equity were 1.17% and 10.87%, respectively, versus 1.03% and 9.41%. The efficiency ratio improved to 58.8% from 62.7%. The company declared a quarterly dividend of $0.05 per share, up from $0.04 in 2016.
Operating cash flow was $6.2 million, compared with $2.5 million in Q1 2016; investing cash outflow was $32.4 million versus $9.1 million; and financing cash flow was $45.7 million versus an outflow of $14.8 million. Cash increased $19.5 million during the quarter. The filing notes $9.9 million of securities purchases were unsettled at March 31 and expected to reduce cash after settlement.
At March 31, stockholders’ equity was $218.1 million. The company reported a tangible common equity ratio of 8.74% and tangible book value of $6.40 per share. Consolidated common equity tier 1, total risk-based capital, tier 1 risk-based capital and tier 1 leverage ratios were 11.75%, 12.61%, 11.89% and 9.47%, respectively. The Bank was classified as well capitalized.
Changes, outlook and significant items
- Loan growth was $33.8 million from year-end, an annualized 9.6%; management attributed it to growth across commercial real estate, commercial and industrial, residential real estate and consumer lending. Deposits increased $15.5 million. Short-term borrowings rose $36.8 million, including additional FHLB advances, as the company maintained its securities portfolio.
- Noninterest income rose 19%, with insurance commissions up $535,000, primarily reflecting the 2016 Bowers Insurance acquisition; mortgage loan-sale gains rose $205,000 and trust fees rose $182,000. Expenses increased 1.2%; higher salaries and benefits were partly offset by lower other operating expenses and merger costs.
- Net interest margin narrowed six basis points year over year. Management cited higher costs of interest-bearing liabilities, which rose eight basis points, while earning-asset yields declined one basis point.
- Credit measures improved year over year: nonperforming loans were 0.45% of total loans versus 0.74%, and nonperforming assets were 0.34% of assets versus 0.55%. Early-stage delinquencies were 0.57% of loans. Net charge-offs were $583,000 versus $368,000; management said the higher provision reflected portfolio growth and somewhat higher charge-offs, and considered the allowance adequate.
- On March 13, 2017, Farmers agreed to acquire Monitor Bancorp, with consideration based on Monitor’s March 31 tangible book value and anticipated wealth-group sale proceeds. The estimated transaction value was approximately $7.8 million, including estimated goodwill of $1.4 million. Closing was expected in late Q2 or early Q3 2017, subject to shareholder and regulatory approvals.
- No formal earnings guidance was provided. Management said liquidity was adequate; available sources included $25 million in unused bank lines, approximately $120.1 million of additional FHLB borrowing capacity, and Federal Reserve discount-window access. It planned to keep the securities portfolio near its current proportion of assets.
- Key risks include local economic and credit conditions, competition, regulation, loan demand, changing technology and interest-rate movements. In the company’s modeled scenarios, net interest income declined 1.8% under a 300-basis-point rate increase and 3.2% under a 100-basis-point decrease; results were within internal limits. Management also identified the company as slightly asset-sensitive.
- The expected-credit-loss standard (ASU 2016-13) is effective for the company in 2020; management was gathering historical credit data and had not determined its full impact. Management expected no material impact from several other forthcoming accounting standards, while still assessing revenue-recognition effects on certain fee income.
- Management reported no material adverse legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. It stated that normal recurring adjustments were made in the interim statements.
Investor verification priorities
- Confirm Monitor merger consideration, regulatory and shareholder approvals, and actual closing timing against subsequent filings.
- Track loan growth, credit quality, net charge-offs, the loan-loss allowance and portfolio concentrations, including acquired loans.
- Assess funding mix and cost: deposit growth, reliance on short-term FHLB advances and repurchase agreements, and the effect on net interest margin.
- Reconcile reported results with management’s non-GAAP acquisition-adjusted figures and monitor whether Bowers-related income and expenses persist.
- Review the impact of unsettled securities purchases on cash and future adoption effects of the expected-credit-loss standard.