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Farmers National Banc(FMNB) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Unaudited consolidated financial statements, including balance sheets, income statements, and cash flows, are presented with detailed notes Consolidated Balance Sheets This section provides a snapshot of the Company's financial position, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheet Highlights (In Thousands of Dollars) | Metric | June 30, 2019 | December 31, 2018 | | :---------------------- | :------------ | :---------------- | | Total Assets | $2,405,949 | $2,328,864 | | Total Liabilities | $2,121,124 | $2,066,544 | | Total Stockholders' Equity | $284,825 | $262,320 | | Net Loans | $1,766,282 | $1,722,248 | | Total Deposits | $2,000,635 | $1,799,720 | | Short-term Borrowings | $91,312 | $244,759 | - Total assets increased by $77.085 million from December 31, 2018, to June 30, 2019, reflecting growth in net loans and securities available for sale8 - Total deposits saw a significant increase of $200.915 million, while short-term borrowings decreased substantially by $153.447 million8 Consolidated Statements of Income This section details the Company's revenues, expenses, and net income over specific periods Consolidated Statements of Income Highlights (In Thousands except Per Share Data) | Metric (Unaudited) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Interest and Dividend Income | $25,529 | $22,474 | $50,208 | $43,756 | | Total Interest Expense | $5,038 | $2,912 | $9,752 | $5,248 | | Net Interest Income | $20,491 | $19,562 | $40,456 | $38,508 | | Provision for Loan Losses | $750 | $750 | $1,300 | $1,525 | | Total Noninterest Income | $6,994 | $6,306 | $13,514 | $12,316 | | Total Noninterest Expenses | $16,704 | $15,458 | $32,681 | $30,554 | | Net Income | $8,543 | $8,073 | $16,931 | $15,799 | | Earnings Per Share - basic | $0.31 | $0.29 | $0.61 | $0.57 | | Earnings Per Share - fully diluted | $0.31 | $0.29 | $0.61 | $0.57 | - Net income for the three months ended June 30, 2019, increased by $470 thousand (5.8%) year-over-year, driven by higher net interest income and noninterest income, despite increased interest and noninterest expenses13 - For the six months ended June 30, 2019, net income rose by $1.132 million (7.2%) compared to the same period in 201813 Consolidated Statements of Comprehensive Income This section presents the Company's net income and other comprehensive income components, such as unrealized gains or losses on securities Consolidated Statements of Comprehensive Income Highlights (In Thousands) | Metric (Unaudited) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $8,543 | $8,073 | $16,931 | $15,799 | | Other comprehensive income (loss), net of tax | $7,282 | $(204) | $11,907 | $(7,226) | | Total Comprehensive Income | $15,825 | $7,869 | $28,838 | $8,573 | - Total comprehensive income significantly increased for both the three and six months ended June 30, 2019, primarily due to substantial net unrealized holding gains on available-for-sale securities, net of tax15 Consolidated Statement of Stockholders' Equity This section outlines changes in the Company's equity, including common stock, retained earnings, and other comprehensive income Stockholders' Equity Highlights (In Thousands of Dollars) | Metric (Unaudited) | June 30, 2019 | June 30, 2018 | | :----------------------------------------------------- | :------------ | :------------ | | Common Stock (Ending balance) | $185,687 | $186,931 | | Retained Earnings (Ending balance) | $95,557 | $71,305 | | Accumulated Other Comprehensive Income (Loss) (Ending balance) | $7,877 | $(6,799) | | Treasury Stock, at cost (Ending balance) | $(4,296) | $(3,927) | | Total Stockholders' Equity | $284,825 | $247,510 | - Total stockholders' equity increased by $37.315 million year-over-year, largely driven by an increase in retained earnings and a positive shift in accumulated other comprehensive income from a loss to a gain1819 - Dividends declared for the six months ended June 30, 2019, were $5.004 million ($0.18 per share), an increase from $3.871 million ($0.14 per share) in the prior year19 Consolidated Statements of Cash Flows This section presents the Company's cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Highlights (In Thousands of Dollars) | Cash Flow Activity (Unaudited) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------- | :--------------------------- | :--------------------------- | | Net Cash From Operating Activities | $14,600 | $16,006 | | Net Cash From Investing Activities | $(49,204) | $(64,726) | | Net Cash From Financing Activities | $40,685 | $67,729 | | Net Change in Cash and Cash Equivalents | $6,081 | $19,009 | | Ending Cash and Cash Equivalents | $64,007 | $76,623 | - Net cash used in investing activities decreased by $15.522 million, primarily due to lower net loan originations and payments23 - Net cash from financing activities decreased by $27.044 million, mainly driven by a significant net change in deposits offset by a decrease in short-term borrowings23 Notes to Unaudited Consolidated Financial Statements Detailed explanations of accounting policies, new standards, and specific financial instrument details are provided Principles of Consolidation, Basis of Presentation, Estimates, Segments, Equity, and Comprehensive Income The Company operates as a Financial Holding Company, consolidating its banking and subsidiary operations, with financial statements prepared under Form 10-Q and managed across three segments - Farmers National Banc Corp. operates as a Financial Holding Company, consolidating its nationally chartered subsidiary, The Farmers National Bank of Canfield, and other subsidiaries25 - The Company's operations are managed and reported across three primary business segments: the Bank segment, the Trust segment, and the Retirement Consulting segment28 - As of June 30, 2019, the Company had 27,767,683 shares outstanding, following an increase in authorized shares to 50,000,000 in April 201829 New Accounting Standards This section outlines the adoption of new accounting standards and their impact on the Company's financial statements - ASU 2018-07 (Compensation-Stock Compensation) and ASU 2017-12 (Derivatives and Hedging) were adopted effective January 1, 2019, with no significant impact on the consolidated financial statements3133 - ASU 2016-02 (Leases) was adopted on January 1, 2019, requiring the capitalization of $3.4 million on the balance sheet as a right-to-use asset and a related liability, with no income statement effect37 - ASU 2016-13 (Financial Instruments-Credit Losses), which requires measuring all expected credit losses, will be adopted on January 1, 2020, and management has not yet determined its full impact36 Securities This section details the Company's investment securities portfolio, including fair value, unrealized gains and losses, and sales proceeds Available-for-Sale Investment Securities (In Thousands of Dollars) | Metric | June 30, 2019 | December 31, 2018 | | :----------------------------------- | :------------ | :---------------- | | Amortized Cost | $414,281 | $407,276 | | Gross Unrealized Gains | $10,859 | $2,231 | | Gross Unrealized Losses | $(888) | $(7,317) | | Fair Value | $424,252 | $402,190 | - Proceeds from the sale of portfolio securities were $10.3 million for the six months ended June 30, 2019, realizing gross gains of $24 thousand and gross losses of $57 thousand46 - Unrealized losses on debt securities decreased from $10.5 million at June 30, 2018, to $888 thousand at June 30, 2019, and were deemed temporary, mainly due to changes in interest rates52 Loans This section provides an overview of the Company's loan portfolio, including balances, allowance for loan losses, and credit quality indicators Loan Balances (In Thousands of Dollars) | Loan Type | June 30, 2019 | December 31, 2018 | | :------------------------- | :------------ | :---------------- | | Total Originated Loans | $1,554,205 | $1,482,297 | | Total Acquired Loans | $223,394 | $250,540 | | Net Loans | $1,766,282 | $1,722,248 | Allowance for Loan Losses Activity (In Thousands of Dollars) | Metric (6 Months Ended) | June 30, 2019 | June 30, 2018 | | :------------------------- | :------------ | :------------ | | Beginning Balance | $13,592 | $12,315 | | Provision for Loan Losses | $1,300 | $1,525 | | Loans Charged Off | $(1,154) | $(1,559) | | Recoveries | $484 | $483 | | Total Ending Allowance Balance | $14,222 | $12,764 | - Troubled debt restructurings totaled $5.1 million at June 30, 2019, with $67 thousand in specific reserves allocated79 - The Company categorizes loans into risk categories (Special Mention, Substandard, Doubtful, Pass) based on borrower's ability to service debt and collateral pledged909293 Revenue from Contracts with Customers This section details the Company's noninterest income streams recognized under ASC 606, categorized by business segment Total Noninterest Income by Segment (In Thousands of Dollars) | Segment / Period | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Trust Segment | $1,821 | $1,740 | $3,679 | $3,547 | | Bank Segment | $4,723 | $4,101 | $9,027 | $7,925 | | Retirement Consulting Segment | $450 | $465 | $808 | $844 | | Total Noninterest Income | $6,994 | $6,306 | $13,514 | $12,316 | - Service charges on deposit accounts, debit card interchange fees, trust fees, insurance agency commissions, retirement plan consulting fees, and investment commissions are recognized as noninterest income104105106107111112 - The adoption of ASC 606 on January 1, 2018, did not result in a change to the accounting for any in-scope revenue streams, and no cumulative effect adjustment was recorded40 Fair Value This section explains the Company's fair value measurements for financial instruments, categorized by a three-level hierarchy based on input observability - Fair value is defined as the exit price in an orderly transaction between market participants, categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)114 Assets Measured at Fair Value on a Recurring Basis (June 30, 2019, In Thousands of Dollars) | Asset Type | Carrying Value | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :------------- | :------ | :-------- | :------ | | Investment securities available-for-sale | $424,252 | $0 | $424,246 | $6 | | Equity securities at fair value | $559 | $559 | $0 | $0 | | Loan yield maintenance provisions | $1,805 | $0 | $1,805 | $0 | - Impaired loans and other real estate owned are generally measured at fair value on a non-recurring basis, with valuations often based on real estate appraisals and classified as Level 3 due to significant unobservable adjustments119120129 Goodwill and Intangible Assets This section details the Company's goodwill and acquired intangible assets, including their balances and amortization expense - Goodwill associated with past acquisitions, including Monitor in August 2017, totaled $38.2 million at June 30, 2019, and December 31, 2018139 Acquired Intangible Assets (In Thousands of Dollars) | Intangible Asset | June 30, 2019 Net | December 31, 2018 Net | | :--------------------------- | :---------------- | :-------------------- | | Customer relationship intangibles | $1,501 | $1,729 | | Non-compete contracts | $48 | $50 | | Trade name | $267 | $291 | | Core deposit intangible | $3,281 | $3,681 | | Total | $5,097 | $5,751 | - Aggregate amortization expense for acquired intangible assets was $327 thousand for the three months and $654 thousand for the six months ended June 30, 2019140 Leases This section outlines the Company's operating lease obligations, including right-of-use assets, lease liabilities, and related financial metrics - As of June 30, 2019, the right-of-use asset and lease liability for operating leases were both $3.4 million143 - Lease payments made for the six months ended June 30, 2019, totaled $292 thousand145 - The weighted-average remaining lease term for all leases was 6.9 years, and the weighted-average discount rate was 3.4% as of June 30, 2019145 Interest-Rate Swaps This section describes the Company's use of interest-rate swaps for asset/liability management and their fair value measurement - Interest-rate swaps are used for asset/liability management to protect fixed-rate commercial real estate loans from interest rate changes, not for trading purposes148149 Interest-Rate Swaps Summary (In Thousands) | Metric | June 30, 2019 | December 31, 2018 | | :----------------------------------------- | :------------ | :---------------- | | Notional amounts | $43,357 | $35,996 | | Weighted average pay rate on interest-rate swaps | 4.50% | 4.53% | | Weighted average receive rate on interest-rate swaps | 4.62% | 4.78% | | Fair value of interest-rate swaps | $(1,805) | $(767) | | Fair value of loan yield maintenance provisions | $1,805 | $767 | - Both interest-rate swaps and embedded yield maintenance provisions are carried at fair value, with changes reported in current period earnings, and no net gains or losses were recognized for the three and six months ended June 30, 2019 and 2018149150 Earnings Per Share This section presents the Company's basic and diluted earnings per share for the reported periods Earnings Per Share (EPS) (Unaudited) | Metric (Per Share Data) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :---------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $0.31 | $0.29 | $0.61 | $0.57 | | Diluted EPS | $0.31 | $0.29 | $0.61 | $0.57 | - Weighted average shares outstanding for diluted EPS were 27,931,200 for the three months and 27,950,331 for the six months ended June 30, 2019152 Stock Based Compensation This section details the Company's equity incentive plan, including share awards granted and recognized compensation expense - The 2017 Equity Incentive Plan permits the award of up to 800,000 shares to directors and employees153 - For the six months ended June 30, 2019, 34,413 service-time based and 67,651 performance-based share awards were granted153 - Stock compensation expense recognized was $664 thousand for the six months ended June 30, 2019, with $2.2 million of total unrecognized compensation expense remaining154 Other Comprehensive Income (Loss) This section highlights the components of other comprehensive income, primarily driven by changes in the fair value of available-for-sale securities Net Other Comprehensive Income (Loss) (In Thousands of Dollars) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Unrealized holding gains (losses) on AFS securities (Pre-tax) | $9,203 | $(242) | $15,024 | $(9,128) | | Net other comprehensive income (loss) (After-Tax) | $7,282 | $(204) | $11,907 | $(7,226) | - The positive change in the fair value of securities was the primary reason for the increase in other comprehensive income for both the three and six month periods ended June 30, 2019213215 Regulatory Capital Matters This section details the Company's compliance with Basel III capital requirements and its "well capitalized" status - Basel III capital requirements, including a 2.5% capital conservation buffer, were fully implemented on January 1, 2019162165 Regulatory Capital Ratios (June 30, 2019) | Capital Ratio (Consolidated) | Actual Ratio | Requirement for Adequacy | Well Capitalized Requirement | | :--------------------------- | :----------- | :----------------------- | :--------------------------- | | Common equity tier 1 capital ratio | 12.47% | 4.5% | N/A | | Total risk based capital ratio | 13.34% | 8.0% | N/A | | Tier I risk based capital ratio | 12.59% | 6.0% | N/A | | Tier I leverage ratio | 10.27% | 4.0% | N/A | - The Bank was categorized as 'well capitalized' under the regulatory framework for prompt corrective action at both June 30, 2019, and December 31, 2018167 Segment Information This section provides financial performance data for the Company's Trust, Bank, and Retirement Consulting segments, and notes a corporate reorganization - The Company's reportable segments are Banking, Trust, and Retirement Consulting, distinguished by products and services offered and information provided to decision-makers170 Segment Net Income (6 Months Ended June 30, 2019, In Thousands of Dollars) | Segment | Net Income | | :-------------------------- | :--------- | | Trust Segment | $968 | | Bank Segment | $16,248 | | Retirement Consulting Segment | $75 | | Eliminations and Others | $(360) | | Consolidated Totals | $16,931 | - Effective July 1, 2019, Trust acquired NAI through a corporate reorganization, combining them into a single reporting unit to enhance efficiencies172 Subsequent Event and Contingencies This section discusses a corporate reorganization and a pending legal settlement, including an accrued charge and expected insurance recovery - On July 1, 2019, Trust acquired all shares of NAI from the Company through a corporate reorganization, combining the entities into one reporting unit for internal and external reports172 - The Company accrued a $505 thousand charge during the fiscal quarter ended June 30, 2019, related to a pending legal settlement, with an expectation of insurance recovery173 Short-term Borrowings This section details the Company's short-term borrowing activities, including Federal Home Loan Bank Advances and repurchase agreements - Short-term Federal Home Loan Bank Advances decreased to $88 million at June 30, 2019, from $240 million at December 31, 2018175 - Securities sold under repurchase agreements totaled $3.0 million at June 30, 2019, secured by $3.1 million in pledged debt securities175176 Securities Sold Under Repurchase Agreements by Collateral Class (In Thousands of Dollars) | Collateral Class | June 30, 2019 | December 31, 2018 | | :--------------------------------------- | :------------ | :---------------- | | U.S. Treasury and U.S. government sponsored entities | $167 | $332 | | State and political subdivisions | $717 | $664 | | Mortgage-backed securities - residential | $1,829 | $3,094 | | Collateralized mortgage obligations - residential | $249 | $319 | | Total repurchase agreements | $2,962 | $4,409 | Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion covers financial performance, condition, asset quality, liquidity, capital, and critical accounting policies Cautionary Note Regarding Forward Looking Statements This section advises readers that the report contains forward-looking statements subject to inherent uncertainties and risks - The report contains forward-looking statements based on current expectations, beliefs, and assumptions, which are subject to inherent uncertainties, risks, and changes in circumstances178 - Readers are cautioned that actual future results could differ materially from those contained in forward-looking information, and the Company disclaims any obligation to update these statements178180 Overview This section provides a high-level summary of the Company's financial performance, including net income, loan growth, asset quality, and net interest margin Key Financial Performance Overview | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Income | $8.5 million | $8.1 million | $16.9 million | $15.8 million | | Diluted EPS | $0.31 | $0.29 | $0.61 | $0.57 | | Annualized Return on Average Assets | 1.45% | 1.47% | 1.45% | 1.46% | | Annualized Return on Average Equity | 12.34% | 13.28% | 12.54% | 13.13% | - Total loans grew to $1.78 billion at June 30, 2019, an annualized growth rate of 5.1%, driven by increases in commercial, commercial real estate, residential real estate, and agricultural loan categories183 - Non-performing assets remained low at 0.30% of total assets, and net charge-offs for the quarter were $305 thousand (0.07% of average net loans outstanding)184 - The net interest margin decreased by 9 basis points to 3.84% for the three months ended June 30, 2019, primarily due to a 47 basis point increase in the cost of interest-bearing liabilities, outpacing a 25 basis point increase in asset yields185 - Noninterest income increased by 10.9% to $7.0 million for the quarter, driven by gains on mortgage loan sales, other operating income, trust fees, and service charges on deposit accounts188 - Noninterest expenses increased to $16.7 million for the quarter, including $505 thousand in non-recurring expenses, leading to a slight increase in the efficiency ratio to 58.3%189190 Results of Operations This section analyzes the Company's financial performance, focusing on net interest income, noninterest income, noninterest expense, income taxes, and other comprehensive income Net Interest Income This section analyzes the Company's net interest income and net interest margin, highlighting factors influencing their changes Net Interest Income and Margin (In Thousands) | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net Interest Income | $20,491 | $19,562 | $40,456 | $38,508 | | Net Interest Income (Tax Equivalent) | $21,025 | $20,010 | $41,508 | $39,387 | | Net Interest Margin | 3.84% | 3.93% | 3.83% |