Farmers National Banc Corp. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Farmers National Banc Corp. (NASDAQ: FMNB) is an Ohio-based financial holding company operating primarily through its community bank and trust businesses in northeastern Ohio and southwestern Pennsylvania. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total interest and dividend income | $102.0 | $91.8 |
| Net interest income | $82.4 | $78.5 |
| Provision for loan losses | $2.5 | $3.0 |
| Noninterest income | $28.6 | $25.5 |
| Noninterest expense | $65.5 | $62.7 |
| Net income | $35.8 | $32.6 |
| Diluted earnings per share | $1.28 | $1.16 |
| Net interest margin, fully taxable-equivalent basis | 3.82% | 3.87% |
| Return on average assets / equity | 1.50% / 12.56% | 1.46% / 13.13% |
- Net income increased 9.8%; diluted EPS increased 10.3%. Net interest income rose 4.9%, while noninterest income rose 12.2%. The provision for loan losses declined by $0.6 million.
- The net interest margin declined 5 basis points as funding costs rose faster than asset yields. Average earning-asset yield was 4.71%, up from 4.51%; the cost of interest-bearing liabilities rose to 1.18% from 0.85%.
- Efficiency ratio was 56.59%, improved from 57.93%. Noninterest expense increased 4.4%, including a $0.5 million legal expense and higher merger-related costs; lower FDIC insurance expense partly offset increases.
- At year-end, assets were $2.449 billion, net loans $1.797 billion, deposits $2.009 billion, and stockholders’ equity $299.3 million. Loans grew 4.4% organically. Commercial real estate and residential real estate together represented 61.6% of loans.
- Cash and cash equivalents were $70.8 million. Operating cash flow was $38.8 million; investing activities used $93.1 million, and financing activities provided $67.2 million. Deposits increased $209.2 million during the year.
- Short-term borrowings fell to $77.1 million from $244.8 million; long-term borrowings rose to $45.1 million from $6.0 million. The Bank had $117.8 million of FHLB advances outstanding and reported approximately $460 million of additional FHLB borrowing capacity.
- Core deposits represented approximately 90.3% of deposits; unpledged investment securities were $179.2 million. Management described liquidity as more than adequate. The Bank was categorized as well capitalized; year-end Bank ratios included 11.19% common equity Tier 1, 11.95% total risk-based capital, and 9.06% Tier 1 leverage.
- Asset quality improved: nonperforming loans were $6.3 million, or 0.35% of loans, versus $7.7 million, or 0.45%, in 2018. Net charge-offs were $1.6 million, or 0.09% of average loans. The allowance was $14.5 million, or 0.80% of loans.
Material changes and notable events
- On January 7, 2020, after the reporting date, Farmers completed its acquisition of Maple Leaf Financial, parent of Geauga Savings Bank. Maple Leaf had $277.0 million of assets, $182.1 million of gross loans, and $183.1 million of deposits at closing. Consideration included cash and 1,398,229 Farmers shares, with a stated total value of $39.2 million. Management expects synergies and cost savings; integration and realization risks remain.
- Farmers repurchased 201,169 shares in 2019 under a new authorization for up to 1.5 million shares. It paid $0.38 per share in dividends, compared with $0.30 in 2018.
- The portfolio of available-for-sale securities increased in fair value, contributing $13.9 million of after-tax other comprehensive income, compared with a $4.5 million after-tax loss in 2018.
- The Company adopted lease accounting in 2019, recognizing a $3.1 million right-of-use asset and a related lease liability at year-end.
- Effective January 1, 2020, adoption of the current expected credit losses standard increased the allowance for loan losses by approximately $2.5 million, with a one-time adjustment to equity.
Outlook, risks and contingencies
- Management expected the 2020 effective tax rate to be 15%–17% and said it expected noninterest income to increase, while continuing to monitor expenses and interest-rate positioning. The filing provides no earnings or revenue guidance.
- Key risks include local economic weakness, interest-rate and margin changes, credit losses, and concentrations in commercial and residential real estate. Consumer indirect auto lending also exposes the Company to credit risk on depreciating collateral.
- In a modeled 100-basis-point rate decline, net interest income was projected to fall 4.4% and net present value of equity 19.7%. The latter exceeded the Company’s policy limit; management said it would continue monitoring the exception.
- The Company accrued $505,000 for a pending legal settlement and expects insurance recovery, but had not recorded a receivable for that recovery at year-end. Management said this was the only legal contingency requiring an accrual; other litigation outcomes could still be material in a future period.
- Other risks identified include acquisition integration and execution, competition, cybersecurity and operational disruptions, regulatory changes, and the dependence of parent-company dividends on regulated subsidiary distributions.
- Management and the independent auditor reported effective internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal control.
Most important facts for investors to verify
- Whether Maple Leaf integration delivers the expected cost savings and earnings contribution, and how the transaction affects capital, shares outstanding, and credit quality.
- Whether the 2020 CECL allowance adjustment proves adequate as economic conditions and loan performance evolve.
- Trends in net interest margin, deposit pricing, and the disclosed exposure to falling rates, including the policy exception in modeled net present value of equity.
- Developments in real estate and indirect auto loan quality, delinquency trends, charge-offs, and allowance coverage.
- Resolution of the pending legal settlement and whether the expected insurance recovery is collected.
- Capacity to sustain dividends and repurchases while supporting growth, acquisitions, and regulatory capital requirements.