Farmers National Banc Corp. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The company is an Ohio-based financial holding company operating banking, trust, retirement consulting, insurance and investment businesses, primarily in northeastern Ohio. The filing also reports fourth-quarter results.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total interest and dividend income | $72.5 million | $53.8 million |
| Net interest income | $68.1 million | $49.7 million |
| Net interest margin, fully taxable equivalent | 4.01% | 3.81% |
| Provision for loan losses | $3.9 million | $3.5 million |
| Noninterest income | $23.2 million | $18.3 million |
| Noninterest expense | $59.5 million | $54.0 million |
| Net income | $20.6 million | $8.1 million |
| Diluted earnings per share | $0.76 | $0.36 |
| Return on average assets / equity | 1.07% / 9.72% | 0.54% / 4.97% |
- Balance sheet at year-end: Total assets were $1.966 billion; net loans $1.417 billion; deposits $1.525 billion; total stockholders’ equity $213.2 million.
- Credit quality: Nonperforming loans were $8.2 million, or 0.57% of loans, versus $10.4 million, or 0.81%, in 2015. The allowance for loan losses was $10.9 million, 0.76% of total loans; net charge-offs were $2.0 million, or 0.15% of average loans.
- Cash flow: Operating activities provided $24.3 million; investing activities used $115.2 million; financing activities provided $76.7 million. Cash and cash equivalents declined by $14.2 million to $41.8 million.
- Liquidity and debt: Core deposits represented approximately 97% of deposits. Unpledged securities were $128 million, and the Bank had an additional $144 million of FHLB borrowing capacity. Short- and long-term borrowings totaled $213.5 million, down from $248.0 million.
- Capital: The Bank was classified as well capitalized. Its common equity Tier 1 ratio was 11.12%, total risk-based capital ratio 11.82%, and Tier 1 leverage ratio 8.91%.
- Shareholder returns: Annual cash dividends increased to $0.16 per share from $0.12. Book value per share was $7.88 and tangible book value per share was $6.21 at year-end.
Material changes versus 2015
- Net income rose to $20.6 million from $8.1 million. Excluding merger-related expenses, management reported adjusted net income of $21.0 million, or $0.78 per share, versus $12.9 million, or $0.57, in 2015. The reported comparison reflects acquisitions and lower merger costs as well as operating performance.
- Growth in net interest income reflected a larger earning-asset base, including the full-year contribution of the 2015 bank acquisitions, while average loan yield remained 4.74%. Management cited lower funding costs and a shift toward higher-yielding loans as drivers of the margin increase.
- Noninterest income increased, notably from mortgage loan sale gains ($2.8 million versus $1.1 million), insurance commissions ($1.6 million versus $0.6 million) and deposit service charges ($4.0 million versus $3.3 million).
- Noninterest expense increased 10.1%, primarily due to higher salaries and benefits and added locations. Merger-related costs fell to $0.6 million from $6.4 million. The reported efficiency ratio improved to 61.59% from 75.26%.
- Loans increased 10% organically during 2016; year-end deposits grew $115.7 million. The loan-to-deposit ratio was 93.63%, versus 92.04%.
- The June 2016 Bowers Insurance Agency acquisition added insurance operations for total consideration of about $3.2 million, including contingent consideration. The company also formed a captive insurance subsidiary in 2016.
Outlook, risks and unusual items
- No specific earnings, revenue or margin guidance is provided. Management expected various noninterest-income sources to grow in 2017 and said it would monitor interest rates and deposit pricing.
- Key risks include local economic weakness, interest-rate and margin sensitivity, real-estate concentration, indirect auto lending, credit losses, deposit competition and liquidity access. Real-estate loans represented about 55% of the loan portfolio according to the risk-factor disclosure.
- A sudden 100-basis-point rate decline was modeled to reduce net interest income by 3.4%; a 300-basis-point increase was modeled to reduce it by 0.1%. Management stated modeled scenarios remained within policy limits.
- Acquisition accounting included $1.8 million of Bowers goodwill and $1.6 million of related intangible assets; some purchase valuations were preliminary. The company reported no goodwill impairment in its 2016 annual test.
- The available-for-sale securities portfolio had $6.6 million of gross unrealized losses at year-end, up from $4.0 million in 2015; management recorded no other-than-temporary impairment and attributed losses primarily to interest rates and liquidity, not credit quality.
- Loan-loss estimates depend on management judgments and economic assumptions. The expected-credit-loss accounting standard (CECL) was not yet adopted; management had not determined its full impact.
- Management believed pending and threatened legal matters would not have a material adverse effect overall, while noting an unfavorable resolution could affect a particular future period. Auditors issued an unqualified opinion; management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How much of the sharp earnings increase reflects sustainable organic growth versus acquisition contributions, purchase-accounting accretion and lower merger costs.
- Whether loan growth, real-estate and consumer credit quality, delinquency trends and the allowance remain appropriate as the portfolio expands.
- The sustainability of the 4.01% net interest margin under changing market rates and deposit competition.
- Liquidity and funding assumptions, including reliance on wholesale borrowings, collateral availability and the maturity profile of FHLB advances and certificates of deposit.
- Integration and performance of Bowers and the 2015 acquisitions, including contingent payments, goodwill and intangible-asset amortization.
- Dividend capacity and capital headroom, given regulatory limits on subsidiary dividends and the continuing Basel III capital-buffer phase-in.