Farmers National Banc Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unless stated otherwise, dollar amounts are in millions; the filing’s financial statements are unaudited. The company provides banking, trust, retirement consulting, and insurance services, primarily in northeastern Ohio.
Financial performance and position
- Third-quarter earnings: Net income was $5.98 million, or $0.22 per diluted share, versus $5.38 million and $0.20 a year earlier. Nine-month net income was $17.48 million, or $0.64 per diluted share, versus $15.19 million and $0.56.
- Interest and revenue: Q3 net interest income rose 8.6% to $18.68 million; noninterest income fell 6.6% to $6.06 million. For nine months, net interest income increased to $54.58 million from $50.83 million, and noninterest income increased to $18.00 million from $17.17 million.
- Margins and returns: Net interest margin was 3.96% for Q3, down 1 basis point year over year, and 4.01% for nine months, down 3 basis points. Nine-month annualized return on average assets was 1.14% and return on average equity 10.41%, versus 1.06% and 9.74%.
- Expenses and credit costs: Q3 noninterest expense increased 3.7% to $15.79 million; provision for loan losses was $0.95 million versus $1.11 million. Nine-month expense was $46.17 million versus $44.45 million, and provision was $2.95 million versus $2.88 million. Q3 efficiency ratio improved to 59.9% from 60.9%.
- Balance sheet at September 30: Assets were $2.16 billion; loans $1.55 billion; deposits $1.61 billion; and stockholders’ equity $237.9 million. Cash and cash equivalents were $84.0 million. Loans-to-deposits stood at 96.4%.
- Funding and liquidity: Short-term borrowings were $286.1 million and long-term borrowings $9.2 million. Short-term borrowings rose from $198.5 million at year-end 2016, largely reflecting FHLB advances. The company reported $15 million of unused bank credit lines, $68.2 million of additional FHLB capacity, and access to the Federal Reserve Discount Window.
- Cash flow, nine months: Operating activities provided $21.2 million; investing activities used $106.6 million; financing activities provided $127.6 million. Cash increased $42.2 million to $84.0 million.
- Capital: The company reported a 12.00% common equity tier 1 ratio, 12.86% total risk-based capital ratio, and 9.70% tier 1 leverage ratio. The Bank was classified as well capitalized under prompt corrective action rules.
Material changes versus comparable periods
- Loan balances grew $123.8 million from December 31, 2016, including $19.3 million of loans acquired with Monitor; management reported annualized loan growth of 11.2%.
- Deposits increased $84.8 million from year-end, including $34.6 million from Monitor. Noninterest-bearing deposits grew $47.1 million.
- Farmers acquired Monitor Bancorp on August 15, 2017 for $7.5 million in cash and stock, adding $41.2 million of assets, including $19.3 million of loans, and $34.6 million of deposits. The acquisition recorded $1.0 million of goodwill.
- Q3 mortgage-loan sale gains declined $0.3 million year over year; debit-card and EFT fees increased $0.1 million. Nine-month insurance commissions rose $0.9 million, principally reflecting a full nine months of Bowers Insurance results.
- Q3 net charge-offs were $0.59 million versus $0.31 million a year earlier. Nonperforming loans were 0.44% of total loans, down from 0.57% at September 2016; nonperforming assets were 0.33% of assets.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management said cash balances may decline as funds are used for loan growth and securities purchases, and intends to maintain the securities portfolio at roughly its current proportion of assets.
- Management attributed margin pressure to rising deposit costs and noted that interest-rate simulations remained within internal limits. The balance sheet was described as slightly asset-sensitive; modeled net interest income declined 0.8% under a 300-basis-point rate increase and 3.4% under a 100-basis-point decrease.
- Management considered the allowance for loan losses adequate. The allowance was $12.1 million, or 0.78% of loans; acquired loans were recorded at fair value without an associated allowance.
- Q3 acquisition-related costs were $270,000 and nine-month costs were $436,000. The company presented adjusted net income of $6.17 million for Q3 and $17.81 million for nine months as non-GAAP measures; reported GAAP net income was lower.
- Unfunded loan commitments totaled $328.7 million. The company had also committed up to $8 million to Small Business Investment Company funds, of which $4.6 million had been invested. Management reported no legal proceedings expected to materially affect financial condition or results and no material changes to previously disclosed risk factors.
- Identified risks include economic and credit conditions, competition, regulation, technology change, loan demand, and interest-rate fluctuations. Management had not determined the impact of the upcoming expected-credit-loss accounting standard; it estimated lease accounting could add $2.6 million each in right-of-use assets and liabilities without a material income-statement effect.
Key facts for investors to verify
- Monitor acquisition integration, realized cost savings, and the effect of acquired deposits and loans on future earnings and credit quality.
- Track deposit pricing, borrowing needs, net interest margin, and the loan-to-deposit ratio as loan growth continues.
- Review loan delinquencies, charge-offs, criticized loans, and allowance adequacy, particularly across commercial real estate, agricultural, and consumer portfolios.
- Assess the sustainability of earnings growth given lower quarterly mortgage-sale gains, higher compensation expense, and acquisition-related costs.
- Reconcile total assets: the consolidated balance sheet reports $2,162.025 million at September 30, while an MD&A selected-ratios table states $2,162.205 million.