Farmers National Banc Corp. — Q2 2014 Form 10-Q
Business and period: Regional financial holding company providing banking, trust, insurance and retirement-plan consulting services in northeastern Ohio. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the same 2013 periods unless noted. Financial amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $8.95 | $9.04 | $17.81 | $18.01 |
| Noninterest income | $3.80 | $3.23 | $7.23 | $6.10 |
| Provision for loan losses | $0.30 | $0.17 | $0.63 | $0.43 |
| Noninterest expense | $9.38 | $9.82 | $18.52 | $18.91 |
| Net income | $2.35 | $1.87 | $4.54 | $3.87 |
| Diluted EPS | $0.13 | $0.10 | $0.24 | $0.21 |
| Net interest margin, tax-equivalent | 3.54% | 3.63% | 3.55% | 3.65% |
| Efficiency ratio, tax-equivalent | 69.68% | 77.16% | 69.77% | 74.88% |
- Q2 net income increased 25.9%; first-half net income increased 17.3%. Return on average assets/equity for the first half was 0.80%/7.74%, versus 0.69%/6.48% in 2013.
- Revenue mix improved: first-half noninterest income rose $1.13 million, led by trust fees, deposit service charges and NAI retirement-plan consulting and commissions. NAI, acquired July 1, 2013, contributed $636,000 of first-half revenue and $115,000 of net income.
- Net interest income softened as asset yields fell faster than funding costs; management attributed lower margin to repricing of existing assets and new loans at lower rates. Lower salaries and benefits and the absence of prior-year merger costs helped reduce expenses. The effective tax rate rose to 22.9% for the first half from 18.8%, partly reflecting a lower share of tax-exempt income.
- At June 30, assets were $1.133 billion, down $4.0 million from year-end 2013. Gross loans were $637.8 million, up $7.1 million since year-end and 6.9% year over year. Available-for-sale securities were $409.3 million, down $13.7 million from year-end.
- Deposits totaled $907.4 million, down $7.8 million from year-end; management said customers were moving some cash to other investment options. Core deposits represented approximately 91% of deposits. Short- and long-term borrowings were $74.5 million and $19.3 million, respectively; total borrowings decreased $7.6 million since year-end.
- Cash and cash equivalents were $28.1 million. First-half operating cash flow was $6.0 million, investing activities provided $11.1 million and financing activities used $16.5 million; cash increased $0.6 million. Cash dividends paid were $1.1 million.
- Stockholders’ equity was $121.0 million, or 10.7% of assets, up $8.0 million from year-end. The increase included $4.5 million of after-tax improvement in securities valuation and $3.4 million of retained net income. Book value per share was $6.44 and tangible book value per share $5.91.
- Regulatory capital ratios at June 30 were 16.60% total risk-based, 15.57% Tier 1 risk-based and 9.87% Tier 1 leverage. Management stated the Company and Bank met applicable capital requirements.
Credit quality, risks and outlook
- Nonperforming assets were $8.5 million, or 0.75% of assets, versus $9.3 million and 0.81% at year-end. Nonperforming loans were $8.1 million, or 1.28% of loans. Loans delinquent 30–89 days totaled $3.5 million, or 0.54% of loans.
- The allowance for loan losses was $7.36 million, or 1.15% of loans, compared with $7.57 million, or 1.20%, at year-end. First-half provision was $630,000; net charge-offs were $842,000, exceeding provision by $213,000. Management considered the allowance adequate. Troubled debt restructurings totaled $8.6 million, up from $8.3 million at year-end; the filing reports defaults on eight recently modified loans, five of which were past due at quarter-end.
- Management said liquidity was adequate and expected cash levels to remain steady over the next few months. Available sources include $25 million of bank lines (of which $5.5 million was drawn), $6.5 million of correspondent-bank revolving lines (of which $350,000 was drawn), and approximately $90.8 million of additional FHLB borrowing capacity. The Bank had $19.3 million outstanding with the FHLB.
- Management described the balance sheet as liability-sensitive and expected net interest margin to maintain current levels in the near term. Interest-rate simulation showed net interest income changes of 0.0% under a 100-basis-point rise and -2.7% under a 100-basis-point decline; net present value of equity fell 11.9% under a 100-basis-point decline, exceeding the Company’s stated policy limit. Management said it did not consider such a decline realistic in the current rate environment.
- Principal stated risks include local economic and credit conditions, banking-industry and regulatory developments, interest-rate changes, loan demand, competition and technology. Basel III rules were scheduled to apply beginning January 1, 2015, with certain provisions phased in through 2019; management was evaluating their impact. Management also was evaluating the future revenue-recognition standard, effective for periods beginning after December 15, 2016.
- No formal earnings guidance was provided. Management highlighted continued focus on noninterest revenue and expense control; two retail branches were closed in Q4 2013. The filing reports no material change in previously disclosed risk factors, no legal proceedings expected to materially affect results, and effective disclosure controls.
Most important facts for investors to verify
- Whether loan growth and increased fee income can offset continued pressure on net interest margin and asset yields.
- Whether credit performance remains stable, particularly consumer and residential charge-offs, restructured-loan defaults and allowance coverage.
- Deposit trends and access to contingent funding, given deposit outflows and reliance on borrowing capacity.
- Exposure to interest-rate changes, including the modeled 11.9% decline in net present value of equity under a 100-basis-point rate decrease.
- How Basel III implementation and NAI’s performance affect capital, earnings and the carrying value of goodwill and intangibles.