Farmers National Banc Corp. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company is an Ohio bank holding company operating banking, trust, retirement consulting and insurance businesses, primarily in northeastern Ohio. Unaudited results are interim and are not necessarily indicative of full-year performance. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2015 / Mar. 31, 2015 | Comparison |
|---|---|---|
| Net income | $2.211; $0.12 diluted EPS | $2.191; $0.12 diluted EPS in Q1 2014 |
| Interest and dividend income | $9.999 | $10.063 in Q1 2014 |
| Net interest income | $8.992 | $8.856 in Q1 2014 |
| Net interest margin, tax-equivalent | 3.64% | 3.56% in Q1 2014 |
| Noninterest income / expense | $4.037 / $9.751 | $3.433 / $9.141 in Q1 2014 |
| Provision for loan losses | $0.450 | $0.330 in Q1 2014 |
| Assets / stockholders’ equity | $1,133.651 / $126.771 | Assets $1,136.967 and equity $123.560 at Dec. 31, 2014 |
| Gross loans / deposits | $673.784 / $909.408 | Loans $663.852 and deposits $915.703 at Dec. 31, 2014 |
| Cash and cash equivalents | $26.929 | $27.428 at Dec. 31, 2014 |
| Borrowings | $80.338 total: $62.218 short-term, $18.120 long-term | $87.517 total at Dec. 31, 2014 |
| Cash flows | Operating $0.865; investing $12.662; financing $(14.026) | Net cash decreased $0.499; ending cash $26.929 |
- Net income was nearly flat year over year. Net interest income improved as interest expense declined, while interest and dividend income edged lower.
- Noninterest income rose 17.6%, led by trust fees, retirement consulting and investment commissions. Management attributed trust and investment growth to new clients and higher market values of assets under management.
- Noninterest expense increased $0.610, primarily from $0.520 higher salaries and benefits and $0.245 of merger-related costs. The efficiency ratio increased to 70.71% from 69.87%.
- Loans grew 1.5% from year-end, mainly in commercial real estate, commercial and industrial, and residential real estate. Deposits declined $6.295; management described first-quarter deposit declines as cyclical and noted customers were moving some funds to other investments. Core deposits were approximately 91.5% of deposits.
- Nonperforming loans were $7.939, or 1.18% of loans, down from $8.481, or 1.28%, at year-end. Delinquencies of 30–89 days were $4.344, or 0.64% of loans. The allowance was $7.723, or 1.15% of loans, and covered 97.28% of nonperforming loans. Management considered the allowance adequate.
- Q1 operating cash flow was $0.865. Investing cash flow included $40.913 of securities-sale proceeds and a $6.000 purchase of bank-owned life insurance; financing included $25.261 of FHLB and other debt repayments and $15.000 of new FHLB advances.
- Equity increased $3.211 from year-end, including a $1.494 after-tax increase in unrealized securities gains and retained earnings growth. Book value per share rose to $6.89 from $6.71; tangible book value per share rose to $6.42 from $6.23.
Material developments, outlook and risks
- The company had agreed to acquire National Bancshares Corporation in a transaction valued at approximately $74 million based on the stated reference share price. Consideration was to be elected as $32.15 cash or 4.034 Farmers shares per National Bancshares share, subject to an overall 80% stock / 20% cash limit. The filing expected closing in the first half of 2015, subject to shareholder and regulatory approvals. Q1 included $0.245 of related costs.
- Management provided no specific earnings or revenue guidance. It expected cash levels to remain steady over the next few months and said current low interest rates should support net interest margin near current levels in the near term. These are forward-looking statements, not guarantees.
- Management reported the Bank was “well capitalized.” At March 31, consolidated common equity Tier 1 and total risk-based capital ratios were 15.03% and 16.02%; the Bank’s corresponding ratios were 13.85% and 14.84%. Management also reported adequate liquidity, including $25.0 million of unused bank lines, approximately $95.2 million of additional FHLB capacity, and access to the Federal Reserve Discount Window. Two correspondent-bank revolving lines totaled $6.5 million, with $0.350 million outstanding.
- Interest-rate risk is a key exposure. The company described its balance sheet as liability-sensitive; its simulation estimated net interest income changes of +3.1% for a 300-basis-point rate increase and −3.3% for a 100-basis-point decrease. A 100-basis-point decrease was estimated to reduce the net present value of equity by 9.1%. Results were within internal limits.
- Other risks cited include economic and banking conditions, credit quality, competition, loan demand, regulation and interest-rate fluctuations. Basel III requirements were being phased in through 2019, and management was evaluating their expected impact. Management reported no material change in previously disclosed risk factors, no material adverse legal proceedings, and effective disclosure controls.
- Available-for-sale securities had $2.063 million of gross unrealized losses at quarter-end, including $1.927 million on securities in a loss position for at least 12 months. Management said it did not consider these losses other-than-temporary, citing factors including issuer credit quality, government backing, and no intent or expected requirement to sell before recovery.
Important facts for investors to verify
- Whether the National Bancshares acquisition closed as expected, its final consideration mix, integration costs, and realized benefits.
- Loan growth quality and concentration, subsequent delinquencies and charge-offs, and the adequacy of the allowance for loan losses.
- Deposit retention, funding costs, liquidity capacity, and the effect of interest-rate changes on net interest income and equity value.
- Trends in noninterest expenses, especially compensation and merger-related costs, and whether fee-income growth continues.
- Changes in securities valuations and unrealized losses, capital ratios, and the practical effect of Basel III requirements.