Farmers National Banc Corp. — FY 2018 Form 10-K
Business context and reporting period
Ohio-based financial holding company operating banking, trust, retirement consulting and insurance businesses, primarily in Northeast Ohio and parts of Pennsylvania. The filing covers the fiscal year ended December 31, 2018; quarterly data below includes Q4 2018. Unless noted, dollar amounts are in millions.
Financial results and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total interest and dividend income | $91.8 | $80.5 |
| Net interest income | $78.5 | $73.6 |
| Net interest margin | 3.87% | 3.99% |
| Noninterest income | $25.5 | $24.1 |
| Noninterest expense | $62.7 | $61.2 |
| Provision for loan losses | $3.0 | $3.4 |
| Income before taxes | $38.3 | $33.2 |
| Net income | $32.6 | $22.7 |
| Diluted EPS | $1.16 | $0.82 |
| Return on average assets / equity | 1.46% / 13.13% | 1.09% / 9.92% |
- Profitability improved, while the efficiency ratio improved to 57.93% from 59.66%. Net interest spread declined to 3.66% from 3.88% as funding costs rose faster than asset yields.
- Net cash from operating activities was $40.0; investing activities used $179.3 and financing activities provided $139.6. Cash and cash equivalents ended the year at $57.9.
- Year-end assets were $2.329 billion, net loans $1.722 billion, deposits $1.800 billion and stockholders’ equity $262.3. Short- and long-term borrowings totaled $250.8, down from $296.6 a year earlier. Core deposits were 93.8% of deposits.
- Loans grew about 10% organically. Commercial real estate and residential real estate represented approximately 65% of the loan portfolio. Nonperforming loans were 0.45% of loans; allowance coverage was 175.81% of nonperforming loans.
- Regulatory capital ratios were above minimums; the Bank was categorized as well capitalized. Unpledged securities were $202.4, and additional FHLB borrowing capacity was approximately $309 million.
Material changes versus the prior period
- Net income rose about 43%, supported by higher net interest and noninterest income and a lower effective tax rate. The 2018 effective tax rate was 14.9%, versus 30.7% in 2017; the 2017 rate included a $1.8 million deferred-tax remeasurement charge following federal tax reform.
- Interest expense increased 92.8% to $13.3 million, reflecting higher deposit and borrowing costs amid Federal Reserve rate increases. Net interest margin fell 12 basis points.
- Deposits increased $195.0 million; short-term borrowings declined $44.8 million. Commercial real estate, agricultural and commercial lending grew notably.
- Net charge-offs decreased to $1.7 million from $1.9 million. The allowance rose to $13.6 million, while nonperforming loans edged down in ratio terms.
- Other comprehensive income shifted to a $4.5 million loss, principally from unrealized losses on available-for-sale securities; accumulated other comprehensive income was a $4.0 million loss at year-end.
Outlook, risks and unusual items
- Management expected 2019 effective taxes of 15%–16% and anticipated noninterest income growth. The filing provides no quantified earnings or revenue guidance.
- Management cited deposit-rate competition and rising funding costs as pressure on margins. Interest-rate modeling showed a 3.0% decline in net interest income and a 16.6% decline in net present value of equity under a 100-basis-point rate decrease; the latter exceeded the company’s 10% policy limit. Management said it would continue monitoring the exception.
- Key risks include regional economic and real-estate conditions, concentrations in real-estate lending, indirect auto credit, loan-loss estimate uncertainty, interest-rate exposure, liquidity and funding access, competition, cybersecurity, regulatory changes and integration of acquired businesses.
- Available-for-sale securities had $7.3 million of gross unrealized losses at year-end; management attributed losses primarily to interest rates and liquidity rather than credit deterioration and did not expect to be required to sell the securities before recovery.
- Q4 net income was $8.7 million, or $0.31 per diluted share, versus $5.2 million, or $0.19, in Q4 2017. Q4 2018 included a $180,000 reduction in merger-related costs from a Bowers acquisition earnout revaluation.
- Management believed pending and threatened legal matters would not materially affect results or equity, though an unfavorable resolution could affect a future period. The company changed its auditor for 2019 after the 2018 audit; it reported no disagreements or reportable events with the outgoing auditor. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Reconcile conflicting 2017 figures in the filing: the audited income statement reports pretax income of $33.2 million, taxes of $10.5 million and noninterest expense of $61.2 million, while selected-data and MD&A disclosures show differing amounts.
- Track deposit pricing, funding costs and margin trends, alongside the composition and growth of wholesale borrowings and brokered deposits.
- Monitor real-estate and agricultural credit quality, consumer auto charge-offs, nonperforming loans, and allowance adequacy as the loan book expands.
- Assess the sensitivity of equity value and earnings to falling rates and management’s response to the disclosed policy-limit exception.
- Review subsequent securities valuation changes, capital and liquidity levels, and the realization of management’s 2019 outlook statements.