Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
FMNB > SEC Filings for FMNB > Form 10-K on 13-Mar-2014All Recent SEC Filings

Show all filings for FARMERS NATIONAL BANC CORP /OH/

Form 10-K for FARMERS NATIONAL BANC CORP /OH/


13-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following presents a discussion and analysis of Farmers' financial condition and results of operations by its management. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 2013, 2012 and 2011. Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance the reader's understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements, and financial statistics appearing elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management's insights of known events and trends that have or may reasonably be expected to have a material effect on Farmers' business, financial condition or results of operations.

Cautionary Note Regarding Forward Looking Statements

Discussions in this Annual Report on Form 10-K that are not statements of historical fact (including statements that include terms such as "will," "may," "should," "believe," "expect," "anticipate," "estimate," "project," intend," and "plan") are forward-looking statements that involve risks and uncertainties. Any forward-looking statement is not a guarantee of future performance, and actual future results could differ materially from those contained in forward-looking information. Factors that could cause or contribute to such differences include, without limitation, risks and uncertainties detailed from time to time in Farmers' filings with the Securities and Exchange Commission, including without limitation the risk factors disclosed in Item 1A, "Risk Factors" of this Annual Report on Form 10-K.

Many of these factors are beyond the Company's ability to control or predict, and readers are cautioned not to put undue reliance on those forward-looking statements. The following list, which is not intended to be an all-encompassing list of risks and uncertainties affecting the Company, summarizes several factors that could cause the Company's actual results to differ materially from those anticipated or expected in these forward-looking statements:

- general economic conditions in market areas where Farmers conducts business, which could materially impact credit quality trends;

- business conditions in the banking industry;

- the regulatory environment;


- fluctuations in interest rates;

- demand for loans in the market areas where Farmers conducts business;

- rapidly changing technology and evolving banking industry standards;

- competitive factors, including increased competition with regional and national financial institutions;

- new service and product offerings by competitors and price pressures; and

- other similar items.

Other factors not currently anticipated may also materially and adversely affect Farmers' business, financial condition, results of operations or cash flows. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this Annual Report on Form 10-K are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. Farmers does not undertake, and expressly disclaims, any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Results of Operations

Comparison of Operating Results for the Years Ended December 31, 2013 and 2012.

The Company's net income totaled $7.8 million during 2013, compared to $9.9 million for 2012. On a per share basis, diluted earnings per share were $0.41 as compared to $0.53 diluted earnings per share for 2012. Common comparative ratios for results of operations include the return on average assets and return on average stockholders' equity. For 2013, the return on average equity was 6.66%, compared to 8.42% for 2012. The return on average assets was 0.68% for 2013 and 0.89% for 2012.

The results for 2013 included $863 thousand in gains on sales of securities, compared to $1.1 million in 2012.

During 2013, the Company completed the acquisition of all outstanding stock of the retirement planning consultancy National Associates, Inc. of Cleveland, Ohio. The company is a leading independent consultant to retirement plans and offers actuarial, plan design, compliance and administrative services. As a third party administrator, NAI provides services to 401(k), defined benefit, profit sharing, flexible spending, 403(b), ESOP and other plans. In acquiring NAI, the Company assumes a professional staff that is highly qualified and credentialed. Synergies and the cost savings resulting from the combining of the operations of the companies will help drive an increase of non-interest income. Net Interest Income

Net interest income, the principal source of the Company's earnings, represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. For 2013, taxable equivalent net interest income decreased $822 thousand, or 2.12%, from 2012. Interest-earning assets averaged $1.061 billion during 2013, increasing $30.4 million, or 2.95%, compared to 2012. The Company's interest-bearing liabilities decreased 0.34% from $881.6 million in 2012 to $878.7 million in 2013.

The Company finances its earning assets with a combination of interest-bearing and interest-free funds. The interest-bearing funds are composed of deposits, short-term borrowings and long-term debt. Interest paid for the use of these funds is the second factor in the net interest income equation. Interest-free funds, such as demand deposits and stockholders' equity, require no interest expense and, therefore, contribute significantly to net interest income.

The profit margin, or spread, on invested funds is a key performance measure. The Company monitors two key performance indicators - net interest spread and net interest margin. The net interest spread represents the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest spread in 2013 was 3.47%, decreasing from 3.66% in 2012. The net interest margin represents the overall profit margin - net interest income as a percentage of total interest-earning assets. This performance indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For 2013, the net interest margin, measured on a fully taxable equivalent basis, decreased to 3.58%, compared to 3.76% in 2012.

The decrease in net interest margin is largely a result of interest-earning assets repricing at lower rate. Total taxable equivalent interest income was $43.0 million for 2013, which is $2.0 million less than the $45.0 million reported in 2012. In comparing the years ending December 31, 2013 and 2012, yields on earning assets decreased 31 basis points while the cost of interest bearing liabilities decreased 12 basis points. Average loans increased $30.6 million, or 5.42%, in 2013, however the yields decreased from 5.71% in 2012 to 5.24% in 2013. Tax equated income from securities, federal funds and other decreased $933 thousand, or 7.3%, in 2013, Farmers saw its yields on these assets decreased from 2.73% in 2012 to 2.53% in 2013. The average balance of investment securities and federal funds sold decreased slightly from $465.4 million in 2012 to $465.2 million in 2013.


Total interest expense amounted to $5.1 million for 2013, a 18.5% decrease from $6.2 million reported in 2012. The decrease in 2013 is the result of lower rates of interest paid on interest-bearing deposits and repurchase agreements. The cost of interest-bearing liabilities decreased from 0.70% in 2012 to 0.58% in 2013.

Management will continue to evaluate future changes in interest rates and the shape of the treasury yield curve so that assets and liabilities may be priced accordingly to minimize the impact on the net interest margin.

Noninterest Income

Total noninterest income increased by $1.3 million in 2013. The increase in noninterest income is due to several factors. Retirement plan consulting fees increased to $477 thousand compared to none in 2012 reflecting the income earned from the newly acquired entity, National Associates, Inc. ("NAI"). Service charges on deposit accounts increased from $2.0 million in 2012 to $2.4 million in 2013 as the Company made adjustments to the service charge structure of its deposit accounts. Bank owned life insurance income increased $170 thousand as the Company received tax free death benefits, which are included in income. Insurance agency commissions also increased $119 thousand and trust fees increased $86 thousand, as management continues to focus on diversifying revenue sources to decrease the reliance on net interest income as the main driver of revenue. Other operating income also increased $406 thousand, which is primarily the result of a gain on the sale of land that was owned by the Company.

Noninterest Expenses

Noninterest expense for 2013 was $39.1 million, compared to $35.8 million in 2012, representing an increase of $3.3 million, or 9.2%. Most of the increase was a result of an 11.7% increase in salary and employee benefits, mainly due to $1.3 million recorded in severance costs. The majority of the severance costs were associated with the departure of the Company's President and CEO in 2013. The Company underwent a cost reduction program in 2013 that included the closure of two retail branch locations and the elimination of several full time positions. The reduction in the number of employees in the bank was offset by the employees included in the acquisition of NAI. Including the 17 employees of NAI, we have 328 full time equivalent employees compared to 335 one year ago.

Professional fees increased 16% as a result of corporate legal and consulting fees related to compensation practices and other business advisory fees. Intangible amortization increased $215 thousand as a result of the amortization of intangible assets related to the acquisition of NAI. Merger related costs also increased $330 thousand, and other operating expenses increased $193 thousand. State and local taxes also increased $110 thousand or 9.1% as a result of an increase in intangible tax paid to the State of Ohio due to higher levels of stockholders' equity.

The Company's tax equivalent efficiency ratio for the twelve month period ended December 31, 2013 was 74.82%, compared to 69.94% for the same period in 2012. The main factor leading to the decline in the efficiency ratio was the increase in noninterest expenses as explained earlier in this section. The efficiency ratio is calculated as follows: non-interest expense divided by the sum of tax equivalent net interest income plus non-interest income, excluding security gains and losses and intangible amortization. This ratio is a measure of the expense incurred to generate a dollar of revenue. Management will continue to closely monitor and keep the increases in other expenses to a minimum.

Income Taxes

Income tax expense totaled $1.7 million for 2013 and $3.1 million in 2012. Income taxes are computed using the appropriate effective tax rates for each period. The decrease in the current year tax expense can be mainly attributed to the $3.5 million decrease in income before taxes. The effective tax rates are less than the statutory tax rate primarily due to nontaxable interest and dividend income. The effective income tax rate was 17.8% for 2013 and 23.5% for 2012. The effective tax rate decrease compared to the same period in 2012 was primarily due to an increase in tax exempt income from securities, loans and bank owned life insurance income. Refer to Note 14 to the consolidated financial statements for additional information regarding the effective tax rate.

Comparison of Operating Results for the Years Ended December 31, 2012 and 2011.

The Company's net income totaled $9.9 million during 2012, compared to $9.2 million for 2011. On a per share basis, diluted earnings per share were $0.53 for 2012, as compared to $0.50 for 2011. For 2012, the return on average equity was 8.42%, as compared to 8.76% for 2011. The return on average assets was 0.89% for 2012 and 2011.


Net Interest Income

For 2012, taxable equivalent net interest income increased $292 thousand, or 0.8%, more than 2011. Interest-earning assets averaged $1,030.3 million during 2012, increasing $71.2 million, or 7.4%, compared to 2011. For 2012, the net interest margin, measured on a fully taxable equivalent basis, was 3.76%, in comparison to 4.01% for 2011.

Total taxable equivalent interest income was $45.0 million for 2012, which was $1.3 million less than the $46.3 million reported in 2011. This decrease was primarily the result of a change in the mix of interest earning assets in 2012. For 2012, loans, which yield more than securities, were 54.8% of average earning assets, compared to 58.6% in 2011. Average loan balances increased $3.1 million, or 0.55%, and the yields decreased from 5.97% in 2011 to 5.71% in 2012. Income from securities and federal funds sold decreased $54 thousand, or 0.42%, in 2012, though Company saw its yields on these assets decrease from 3.21% in 2011 to 2.73% in 2012. The average balances of investment securities and federal funds sold increased 17.1% in 2012, mainly due to increases in customer deposits outpacing opportunities to grow loans.

Total interest expense amounted to $6.2 million for 2012, a 20.7% decrease from $7.8 million reported in 2011. The decrease in 2012 is the result of lower rates of interest paid on interest-bearing deposits and repurchase agreements. The cost of interest-bearing liabilities decreased from 0.93% in 2011 to 0.70% in 2012.

Noninterest Income

Total noninterest income in 2012 increased by $39 thousand. The increase in noninterest income is primarily due to income from the sale of loans, increasing from $113 thousand for the twelve months ended December 31, 2011 to $598 thousand for the same twelve month period in 2012. The Company decided to sell some of the residential real estate loans it originates in order to decrease interest rate risk, reduce liquidity risk and to diversify its revenue streams. The increase in loans sold income was offset by a decrease in security gains, which were $745 thousand higher in 2011. Trust fees also increased $142 thousand and investment commissions increased $83 thousand, as management continues to focus on diversifying revenue sources to decrease the reliance on net interest income as the main driver of revenue.

Noninterest Expenses

Noninterest expense for 2012 was $35.8 million, compared to $33.7 million in 2011, representing an increase of $2.1 million, or 6.0%. Most of the increase was a result of a $12.8% increase in salary and employee benefits, resulting from a higher number of employees in current year and a $561 thousand or 34.6% increase in health insurance costs. The higher employee count is attributed primarily to our Secondary Mortgage project expansion. Occupancy and equipment expense also increased $578 thousand as a result of depreciation expense and small equipment costs related to new facilities. Professional fees increased 10% as a result of corporate legal and consulting fees related to compensation practices and other business advisory fees. There was also an $86 thousand or 1.6% decrease in other operating expenses in 2012 compared to 2011, mainly related to new facilities opened in 2012. These expense increases were offset by $1.2 million in prepayment penalties paid to Federal Home Loan Bank of Cincinnati in the prior year, compared to none in 2012.

State and local taxes also increased $248 thousand or 26.0% as a result of an increase in intangible tax paid to the State of Ohio due to higher levels of stockholders' equity. Core processing charges also increased $126 thousand due to a higher number accounts and new banking products for our customers.

Income Taxes

Income tax expense totaled $3.1 million for 2012 and $2.5 million for 2011. The effective income tax rate was 23.5% for 2012 and 21.6% for 2011.

Liquidity

Farmers maintains, in the opinion of management, liquidity sufficient to satisfy depositors' requirements and meet the credit needs of customers. The Company depends on its ability to maintain its market share of deposits as well as acquiring new funds. The Company's ability to attract deposits and borrow funds depends in large measure on its profitability, capitalization and overall financial condition.

Principal sources of liquidity include assets considered relatively liquid, such as short-term investment securities, federal funds sold and cash and due from banks.


Along with its liquid assets, Farmers has additional sources of liquidity available which help to insure that adequate funds are available as needed. These other sources include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates and the purchasing of federal funds and borrowings on approved lines of credit at two major domestic banks. At December 31, 2013, Farmers had borrowed $6 million against these lines of credit. Management feels that its liquidity position is more than adequate and will continue to monitor the position on a monthly basis. The Company also has additional borrowing capacity with the FHLB, as well as access to the Federal Reserve Discount Window, which provides an additional source of funds. The Company views its membership in the FHLB as a solid source of liquidity. As of December 31, 2013, the Bank is eligible to borrow an additional $84.6 million from the FHLB under various fixed rate and variable rate credit facilities. Advances outstanding from the FHLB at December 31, 2013 amounted to $19.8 million.

Farmers' primary investing activities are originating loans and purchasing securities. During 2013, net cash used in investing activities amounted to $28.0 million, compared to $82.3 million in 2012. Net increases in loans were $45.5 million in 2013, compared to $19.3 in 2012. The cash used by lending activities during 2013 can be attributed to the activity in the commercial real estate, residential real estate and indirect loan portfolios. Purchases of securities available for sale were $149.9 million in 2013, compared to $237.4 million in 2012. Proceeds from maturities and sales of securities available for sale were $169.0 million in 2013, compared to $175.7 million in 2012. There was $2.1 million used to purchase National Associates Inc. during the year ended December 31, 2013.

Farmers' primary financing activities are obtaining deposits, repurchase agreements and other borrowings. Net cash from financing activities amounted to $3.5 million for 2013, compared to $56.7 million in 2012. The majority of this change can be attributed to the change in deposits. Deposits provided $78.9 million during 2012 and used $3.8 million during 2013. Short-term borrowings increased $1.7 million in 2013 compared to an $18.2 million decrease in 2012. There was $10 million in new Federal Home Loan Bank long-term advances during 2013 compared to none last year. The Company used $1.6 million for the acquisition of treasury shares during 2013 compared to none in 2012.

Loan Portfolio

Maturities and Sensitivities of Loans to Interest Rates

The following schedule shows the composition of loans and the percentage of
loans in each category at the dates indicated. Balances include unamortized loan
origination fees and costs.



Years Ended
December 31,              2013                     2012                     2011                      2010                      2009
Commercial Real
Estate             $ 217,362      34.4 %    $ 200,651      34.2 %    $ 198,041      34.6 %    $ 203,894        34.5 %    $ 215,917      35.4 %
Commercial           105,023      16.7         97,112      16.6         74,875      13.1         76,635        13.0 %       75,893      12.5
Residential Real
Estate               170,151      27.0        156,182      26.6        167,031      29.2        177,067        30.0 %      180,877      29.7
Consumer             138,148      21.9        132,647      22.6        131,859      23.1        132,771        22.5 %      136,708      22.4
Total Loans        $ 630,684     100.0 %    $ 586,592     100.0 %    $ 571,806     100.0 %    $ 590,367       100.0 %    $ 609,395     100.0 %

The following schedule sets forth maturities based on remaining scheduled repayments of principal for commercial and commercial real estate loans listed above as of December 31, 2013:

      Types of Loans         1 Year or less       1 to 5 Years       Over 5 Years
      Commercial             $        17,233     $       47,802     $       39,988
      Commercial Real Estate $        66,550     $      123,110     $       27,702

The amounts of commercial and commercial real estate loans as of December 31, 2012, based on remaining scheduled repayments of principal, are shown in the following table:

Loan Sensitivities                       1 Year or less       Over 1 Year        Total
Floating or Adjustable Rates of Interest $        75,085     $     117,607     $ 192,692
Fixed Rates of Interest                            8,698           120,995       129,693
Total Loans                              $        83,783     $     238,602     $ 322,385

Total loans were $630.7 million at year-end 2013, compared to $586.6 million at year-end 2012. This represents an increase of 7.52%. The increase in loans has mainly occurred in the commercial real estate, residential real estate, and indirect loan portfolios. Loans comprised 56.1% of the Bank's average earning assets in 2013, compared to 54.8% in 2012. The product mix in the Loan Portfolio includes Commercial Loans comprising 16.7%, Residential Real Estate Loans 27.0%, Commercial Real Estate Loans 34.4% and Consumer Loans 21.9% at December 31, 2013 compared with 16.6%, 26.6%, 34.2% and 22.6%, respectively, at December 31, 2012.


Loans contributed 72.6% of total taxable equivalent interest income in 2013 and 71.7% in 2012. Loan yield was 5.24% in 2013, 119 basis points greater than the average rate for total earning assets. Management recognizes that while the loan portfolio holds some of the Bank's' highest yielding assets, it is inherently the most risky portfolio. Accordingly, management attempts to balance credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the approval process. To minimize risks associated with changes in the borrower's future repayment capacity, the Bank generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral. Consumer Loans increased from $132.6 million on December 31, 2012 to $138.1 million on December 31, 2013, representing a 4.1% increase. Management continues to target the automobile dealer network to purchase indirect installment loans. Dealer paper was purchased using strict underwriting guidelines with an emphasis on quality. Indirect Loans comprise 90.4% of the Consumer Loan portfolio. Net charge-offs in the Consumer Loan portfolio increased to $901 thousand in 2013, as compared to $374 thousand in 2012.

Residential Real Estate Mortgage Loans increased 8.9% to $170.2 million at December 31, 2013, compared to $156.2 million in 2012. Farmers originated both fixed rate and adjustable rate mortgages during 2013. Fixed rate terms are generally limited to fifteen year terms while adjustable rate products are offered with maturities up to thirty years.

Commercial Real Estate loans increased from $200.7 million at December 31, 2012 to $217.4 million at December 31, 2013, an increase of 8.3%. The Company's commercial real estate loan portfolio includes loans for owner occupied and non-owner occupied real estate. These loans are made to finance properties such as office and industrial buildings, hotels and retail shopping centers. Commercial Loans at December 31, 2013 increased 8.1% from year-end 2012 with outstanding balances of $105.0 million. The Bank's commercial loans are granted to customers within the immediate trade area of the Bank. The mix is diverse, covering a wide range of borrowers, business types and local municipalities. The Bank monitors and controls concentrations within a particular industry or segment of the economy. These loans are made for purposes such as equipment purchases, capital and leasehold improvements, the purchase of inventory, general working capital and small business lines of credit.

The growth in the Commercial and Commercial Real Estate loan portfolios was consistent with the improvements in the local economy. Several new projects announced in the Mahoning Valley, along with decreased levels of unemployment have led small business owners to expand or make additional investments in their operations.

Summary of Loan Loss Experience

The following is an analysis of the allowance for loan losses for the periods
indicated:



 Years Ended December 31,             2013         2012         2011         2010         2009
 Balance at Beginning of Year       $  7,629     $  9,820     $  9,307     $  7,400     $  5,553
 Charge-Offs:
 Commercial Real Estate                 (505 )     (1,225 )     (1,246 )     (1,910 )     (2,389 )
 Commercial, Financial and
 Agricultural                            (99 )       (918 )       (414 )     (2,898 )       (911 )
 Residential Real Estate                (326 )       (806 )     (1,736 )       (760 )       (251 )
 Consumer                             (1,723 )     (1,002 )     (1,125 )     (1,177 )     (1,248 )
 Total Charge-Offs                    (2,653 )     (3,951 )     (4,521 )     (6,745 )     (4,799 )
 Recoveries on Previous
 Charge-Offs:
 Commercial Real Estate                  171          253           44           26          178
 Commercial, Financial and
 Agricultural                            262           50           39            8            2
 Residential Real Estate                  47          104          452            2            1
 Consumer                                822          628          849          538          415
 Total Recoveries                      1,302        1,035        1,384          574          596
 Net Charge-Offs                      (1,351 )     (2,916 )     (3,137 )     (6,171 )     (4,203 )
 Provision For Loan Losses             1,290          725        3,650        8,078        6,050
 Balance at End of Year             $  7,568     $  7,629     $  9,820     $  9,307     $  7,400
 Ratio of Net Charge-Offs to
 Average
 Loans Outstanding                      0.23 %       0.52 %       0.56 %       1.02 %       0.72 %

Provisions charged to operations amounted to $1.3 million in 2013, compared to $725 thousand in 2012, an increase of $565 thousand. This increase is primarily due to an increase in the level of non-performing loans, which is a factor considered in management's estimate of loan loss provisions and the adequacy of the allowance for loan losses. Nonperforming loans to total loans increased from 1.40% at December 31, 2012 to 1.44% at December 31, 2013. The change in this ratio was the result of a increase in nonperforming loans of $849 thousand from . . .

  Add FMNB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for FMNB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.