fmnb-10q_20180630.htm

 

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the Quarterly period ended June 30, 2018

Commission file number 001-35296

 

FARMERS NATIONAL BANC CORP.

(Exact name of registrant as specified in its charter)

 

 

OHIO

 

34-1371693

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No)

 

 

 

20 South Broad Street Canfield, OH

 

44406

(Address of principal executive offices)

 

(Zip Code)

(330) 533-3341

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 31, 2018

Common Stock, No Par Value

 

27,640,921 shares

 

 

 

 

 

 

 


 

 

Page Number

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (Unaudited)

 

 

 

 

 

Included in Part I of this report:

 

 

 

 

 

Farmers National Banc Corp. and Subsidiaries

 

 

 

 

 

Consolidated Balance Sheets

2

 

Consolidated Statements of Income

3

 

Consolidated Statements of Comprehensive Income

4

 

Consolidated Statement of Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4

Controls and Procedures

53

 

 

 

PART II - OTHER INFORMATION

53

 

 

 

Item 1

Legal Proceedings

53

 

 

 

Item 1A

Risk Factors

53

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 3

Defaults Upon Senior Securities

53

 

 

 

Item 4

Mine Safety Disclosures

53

 

 

 

Item 5

Other Information

53

 

 

 

Item 6

Exhibits

54

 

 

SIGNATURES

55

 

 

10-Q Certifications

 

 

 

Section 906 Certifications

 

 

 

 

1


 

CONSOLIDATED BALANCE SHEETS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

June 30,

2018

 

 

December 31,

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

18,021

 

 

$

17,785

 

Federal funds sold and other

 

 

58,602

 

 

 

39,829

 

TOTAL CASH AND CASH EQUIVALENTS

 

 

76,623

 

 

 

57,614

 

Securities available for sale

 

 

388,890

 

 

 

392,937

 

Equity securities

 

 

6,344

 

 

 

5,579

 

Loans held for sale

 

 

1,987

 

 

 

272

 

Loans

 

 

1,639,191

 

 

 

1,577,381

 

Less allowance for loan losses

 

 

12,764

 

 

 

12,315

 

NET LOANS

 

 

1,626,427

 

 

 

1,565,066

 

Premises and equipment, net

 

 

21,658

 

 

 

22,286

 

Goodwill

 

 

38,201

 

 

 

38,201

 

Other intangibles

 

 

6,460

 

 

 

7,168

 

Bank owned life insurance

 

 

34,318

 

 

 

33,877

 

Other assets

 

 

37,031

 

 

 

36,069

 

TOTAL ASSETS

 

$

2,237,939

 

 

$

2,159,069

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

420,991

 

 

$

412,346

 

Interest-bearing

 

 

1,229,346

 

 

 

1,192,373

 

TOTAL DEPOSITS

 

 

1,650,337

 

 

 

1,604,719

 

Short-term borrowings

 

 

315,951

 

 

 

289,565

 

Long-term borrowings

 

 

6,614

 

 

 

6,994

 

Other liabilities

 

 

17,527

 

 

 

15,717

 

TOTAL LIABILITIES

 

 

1,990,429

 

 

 

1,916,995

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Common Stock - Authorized 50,000,000 shares in 2018 and 35,000,000 in 2017; issued 28,179,598 in 2018 and 2017

 

 

186,931

 

 

 

186,903

 

Retained earnings

 

 

71,305

 

 

 

59,208

 

Accumulated other comprehensive income (loss)

 

 

(6,799

)

 

 

596

 

Treasury stock, at cost; 538,677 shares in 2018 and 635,550 in 2017

 

 

(3,927

)

 

 

(4,633

)

TOTAL STOCKHOLDERS' EQUITY

 

 

247,510

 

 

 

242,074

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,237,939

 

 

$

2,159,069

 

 

See accompanying notes

 

 

 

2


 

CONSOLIDATED STATEMENTS OF INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands except Per Share Data)

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Unaudited)

 

June 30,

2018

 

 

June 30,

2017

 

June 30,

2018

 

 

June 30,

2017

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

19,545

 

 

$

17,402

 

$

37,972

 

 

$

33,885

 

Taxable securities

 

 

1,228

 

 

 

1,265

 

 

2,461

 

 

 

2,383

 

Tax exempt securities

 

 

1,380

 

 

 

1,170

 

 

2,711

 

 

 

2,241

 

Dividends

 

 

154

 

 

 

123

 

 

300

 

 

 

238

 

Federal funds sold and other interest income

 

 

167

 

 

 

82

 

 

312

 

 

 

145

 

TOTAL INTEREST AND DIVIDEND INCOME

 

 

22,474

 

 

 

20,042

 

 

43,756

 

 

 

38,892

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,723

 

 

 

1,117

 

 

3,134

 

 

 

2,031

 

Short-term borrowings

 

 

1,140

 

 

 

501

 

 

2,021

 

 

 

828

 

Long-term borrowings

 

 

49

 

 

 

51

 

 

93

 

 

 

129

 

TOTAL INTEREST EXPENSE

 

 

2,912

 

 

 

1,669

 

 

5,248

 

 

 

2,988

 

NET INTEREST INCOME

 

 

19,562

 

 

 

18,373

 

 

38,508

 

 

 

35,904

 

Provision for loan losses

 

 

750

 

 

 

950

 

 

1,525

 

 

 

2,000

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

 

 

18,812

 

 

 

17,423

 

 

36,983

 

 

 

33,904

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

985

 

 

 

989

 

 

1,988

 

 

 

1,940

 

Bank owned life insurance income

 

 

219

 

 

 

191

 

 

441

 

 

 

392

 

Trust fees

 

 

1,740

 

 

 

1,523

 

 

3,547

 

 

 

3,201

 

Insurance agency commissions

 

 

713

 

 

 

672

 

 

1,412

 

 

 

1,346

 

Security gains (losses), including fair value changes for equity securities

 

 

27

 

 

 

(14

)

 

45

 

 

 

(1

)

Retirement plan consulting fees

 

 

465

 

 

 

399

 

 

844

 

 

 

912

 

Investment commissions

 

 

315

 

 

 

253

 

 

571

 

 

 

475

 

Net gains on sale of loans

 

 

606

 

 

 

891

 

 

1,093

 

 

 

1,498

 

Debit card and EFT fees

 

 

870

 

 

 

836

 

 

1,676

 

 

 

1,489

 

Other operating income

 

 

366

 

 

 

315

 

 

699

 

 

 

690

 

TOTAL NONINTEREST INCOME

 

 

6,306

 

 

 

6,055

 

 

12,316

 

 

 

11,942

 

NONINTEREST EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

8,828

 

 

 

8,853

 

 

17,566

 

 

 

17,140

 

Occupancy and equipment

 

 

1,611

 

 

 

1,631

 

 

3,315

 

 

 

3,218

 

State and local taxes

 

 

479

 

 

 

424

 

 

938

 

 

 

841

 

Professional fees

 

 

737

 

 

 

775

 

 

1,435

 

 

 

1,522

 

Merger related costs

 

 

0

 

 

 

104

 

 

25

 

 

 

166

 

Advertising

 

 

379

 

 

 

317

 

 

654

 

 

 

561

 

FDIC insurance

 

 

225

 

 

 

234

 

 

447

 

 

 

469

 

Intangible amortization

 

 

355

 

 

 

364

 

 

709

 

 

 

729

 

Core processing charges

 

 

794

 

 

 

717

 

 

1,533

 

 

 

1,372

 

Telephone and data

 

 

238

 

 

 

242

 

 

475

 

 

 

483

 

Other operating expenses

 

 

1,812

 

 

 

2,103

 

 

3,457

 

 

 

3,876

 

TOTAL NONINTEREST EXPENSES

 

 

15,458

 

 

 

15,764

 

 

30,554

 

 

 

30,377

 

INCOME BEFORE INCOME TAXES

 

 

9,660

 

 

 

7,714

 

 

18,745

 

 

 

15,469

 

INCOME TAXES

 

 

1,587

 

 

 

2,004

 

 

2,946

 

 

 

3,976

 

NET INCOME

 

$

8,073

 

 

$

5,710

 

$

15,799

 

 

$

11,493

 

EARNINGS PER SHARE - basic and diluted

 

$

0.29

 

 

$

0.21

 

$

0.57

 

 

$

0.42

 

 

See accompanying notes

 

 

 

3


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

(Unaudited)

 

June 30,

2018

 

 

June 30,

2017

 

June 30,

2018

 

 

June 30,

2017

 

NET INCOME

 

$

8,073

 

 

$

5,710

 

$

15,799

 

 

$

11,493

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on available for sale securities

 

 

(242

)

 

 

5,946

 

 

(9,128

)

 

 

6,321

 

Reclassification adjustment for (gains) losses realized in income

 

 

(1

)

 

 

14

 

 

(3

)

 

 

1

 

Net unrealized holding gains (losses)

 

 

(243

)

 

 

5,960

 

 

(9,131

)

 

 

6,322

 

Income tax effect

 

 

38

 

 

 

(2,087

)

 

1,905

 

 

 

(2,215

)

Other comprehensive income (loss), net of tax

 

 

(205

)

 

 

3,873

 

 

(7,226

)

 

 

4,107

 

TOTAL COMPREHENSIVE INCOME

 

$

7,868

 

 

$

9,583

 

$

8,573

 

 

$

15,600

 

 

See accompanying notes

 

4


 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

(Unaudited)

 

For the

Six Months Ended

June 30, 2018

 

COMMON STOCK

 

 

 

 

Beginning balance

 

$

186,903

 

Issued 96,873 shares under the Long Term Incentive Plan

 

 

(706

)

Stock compensation expense for 608,761 unvested shares

 

 

734

 

Ending balance

 

 

186,931

 

 

 

 

 

 

RETAINED EARNINGS

 

 

 

 

Beginning balance

 

 

59,208

 

Cumulative effect adjustment upon adoption of ASU 2016-01

 

 

169

 

Beginning balance adjusted

 

 

59,377

 

Net income

 

 

15,799

 

Dividends declared at $.14 per share

 

 

(3,871

)

Ending balance

 

 

71,305

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

Beginning balance

 

 

596

 

Cumulative effect adjustment upon adoption of ASU 2016-01

 

 

(169

)

Beginning balance adjusted

 

 

427

 

Other comprehensive loss

 

 

(7,226

)

Ending balance

 

 

(6,799

)

 

 

 

 

 

TREASURY STOCK, AT COST

 

 

 

 

Beginning balance

 

 

(4,633

)

Issued 96,873 shares under the Long Term Incentive Plan

 

 

706

 

Ending balance

 

 

(3,927

)

TOTAL STOCKHOLDERS' EQUITY

 

$

247,510

 

 

See accompanying notes.

 

5


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FARMERS NATIONAL BANC CORP. AND SUBSIDIARIES

 

 

 

(In Thousands of Dollars)

 

 

 

Six Months Ended

 

(Unaudited)

 

June 30,

2018

 

 

June 30,

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

15,799

 

 

$

11,493

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

1,525

 

 

 

2,000

 

Depreciation and amortization

 

 

1,499

 

 

 

1,767

 

Net amortization of securities

 

 

1,544

 

 

 

1,706

 

Security (gains) losses

 

 

(45

)

 

 

1

 

Loss on land and building sales, net

 

 

0

 

 

 

18

 

Stock compensation expense

 

 

734

 

 

 

577

 

(Gain) loss on sale of other real estate owned

 

 

(16

)

 

 

(24

)

Earnings on bank owned life insurance

 

 

(441

)

 

 

(392

)

Origination of loans held for sale

 

 

(26,026

)

 

 

(32,119

)

Proceeds from loans held for sale

 

 

25,404

 

 

 

33,389

 

Net gains on sale of loans

 

 

(1,093

)

 

 

(1,498

)

Net change in other assets and liabilities

 

 

(2,878

)

 

 

(2,950

)

NET CASH FROM OPERATING ACTIVITIES

 

 

16,006

 

 

 

13,968

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from maturities and repayments of securities available for sale

 

 

20,727

 

 

 

22,659

 

Proceeds from sales of securities available for sale

 

 

2,629

 

 

 

54,482

 

Purchases of securities available for sale

 

 

(24,509

)

 

 

(87,203

)

Purchase of restricted stock

 

 

(735

)

 

 

(892

)

Loan originations and payments, net

 

 

(62,908

)

 

 

(78,828

)

Proceeds from sale of other real estate owned

 

 

209

 

 

 

354

 

Additions to premises and equipment

 

 

(139

)

 

 

(664

)

NET CASH FROM INVESTING ACTIVITIES

 

 

(64,726

)

 

 

(90,092

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in deposits

 

 

45,618

 

 

 

16,247

 

Net change in short-term borrowings

 

 

26,386

 

 

 

90,724

 

Repayment of long-term borrowings

 

 

(404

)

 

 

(5,417

)

Cash dividends paid

 

 

(3,871

)

 

 

(2,706

)

Proceeds from reissuance of treasury shares

 

 

0

 

 

 

138

 

NET CASH FROM FINANCING ACTIVITIES

 

 

67,729

 

 

 

98,986

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

19,009

 

 

 

22,862

 

Beginning cash and cash equivalents

 

 

57,614

 

 

 

41,778

 

Ending cash and cash equivalents

 

$

76,623

 

 

$

64,640

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

5,123

 

 

$

2,988

 

Income taxes paid

 

$

4,100

 

 

$

2,500

 

Supplemental noncash disclosures:

 

 

 

 

 

 

 

 

Transfer of loans to other real estate

 

$

22

 

 

$

84

 

Security purchases not settled

 

$

5,481

 

 

$

6,957

 

Issuance of stock awards

 

$

706

 

 

$

133

 

 

See accompanying notes

 

 

 

6


 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Principles of Consolidation:

Farmers National Banc Corp. (“Company”) is a Financial Holding Company registered under the Bank Holding Company Act of 1956, as amended.  The Company provides full banking services through its nationally chartered subsidiary, The Farmers National Bank of Canfield (“Bank”).  The Bank acquired Bowers Insurance Agency, Inc. (“Bowers”) and consolidated the activity of the Bowers with Farmers National Insurance (“Insurance”) during 2016.  The Company acquired Monitor Bancorp, Inc. (“Monitor”), the holding company for Monitor Bank in August of 2017 and consolidated all activity within the Bank.  Farmers National Captive, Inc. (“Captive”) was formed during the third quarter of 2016 and is a wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and its subsidiaries.  The Captive pools resources with thirteen other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves and to provide insurance where not currently available or economically feasible in today’s insurance market place.  The consolidated financial statements also include the accounts of the Bank’s subsidiaries; Insurance and Farmers of Canfield Investment Co. (“Investments”).  The Company provides trust services through its subsidiary, Farmers Trust Company (“Trust”), retirement consulting services through National Associates, Inc. (“NAI”) and insurance services through the Bank’s subsidiary, Insurance.  The consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries, along with the Trust, NAI and Captive.  All significant intercompany balances and transactions have been eliminated in the consolidation.

 

Basis of Presentation:

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report to Shareholders included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented.  The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.  Certain items included in the prior period financial statements were reclassified to conform to the current period presentation. There was no effect on net income or total stockholders’ equity.

 

Estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Segments:

The Company provides a broad range of financial services to individuals and companies in northeastern Ohio and western Pennsylvania.  Operations are managed and financial performance is primarily aggregated and reported in three lines of business, the Bank segment, the Trust segment and the Retirement Consulting segment.  

 

Equity:

The Company, with the approval of shareholders at the April 2018 annual meeting, increased the authorized shares available for issuance from 35,000,000 to 50,000,000 shares.  Outstanding shares at June 30, 2018 were 27,640,921.

Comprehensive Income:

Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income consists of unrealized gains and losses on securities available for sale and changes in the funded status of the post-retirement health plan, which are recognized as separate components of stockholders equity, net of tax effects.  The post-retirement health plan was eliminated during 2017 and the associated balance sheet accounts, including other comprehensive income were reduced to zero.

 

New Accounting Standards:

During April of 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  Under current U.S. GAAP, a premium is typically amortized to the

7


 

maturity date when a callable debt security is purchased at a premium, even if the holder is certain the call will be exercised.  As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings.  The new standard shortens the amortization period for the premium to the earliest call date to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument.  The standard takes effect for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted, including adoption in an interim period.  The Company early adopted this ASU effective January 1, 2018 and there was no material impact on its Consolidated Financial Statements.

In June 2016, the FASB issued ASU 2016-13: Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances.  Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The Company has begun to accumulate historical credit information, established an internal committee and begun the installation process of new software in preparation for testing in early 2019.  Adoption of ASU 2016-13 will happen on January 1, 2020.  Management has not determined the full impact the new standard will have on the Consolidated Financial Statements.

In January 2016, FASB issued ASU 2016-01: Financial Instruments – Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.  The main objective of ASU 2016-01 is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information.  ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  Some of the amendments in ASU 2016-01  include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others.  The Company adopted ASU 2016-01 on January 1, 2018 and recorded a cumulative effect adjustment of $169 thousand increase to retained earnings and a decrease to accumulated other comprehensive income.  The change in fair value for equity securities which is now recorded in net income rather than comprehensive income was not material for the three and six months ended June 30, 2018.

In May 2014, FASB issued ASU 2014-09: Revenue from Contracts with Customers (Topic 606).  The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  The new guidance is effective for the Company’s year ending December 31, 2018 and was adopted as of January 1, 2018.  Interest income is outside of the scope of the new standard and was not impacted by the adoption of the standard.  An evaluation of the Company’s noninterest income streams resulted in no change in revenue recognition since adoption.  Refer to the Revenue from Contracts with Customers footnote for further discussion on the Company’s accounting for revenue sources within the scope of ASC 606.

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018.  Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP.  The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

 

 

8


 

Business Combinations:

 

On August 15, 2017, the Company completed the acquisition of Monitor Bancorp, Inc. (“Monitor”), the holding company for Monitor Bank.  The transaction involved both cash and 465,787 shares of stock totaling $7.5 million.  Pursuant to the terms of the merger agreement, common shareholders of Monitor were entitled to elect to receive consideration in cash or in common shares, without par value, of the Farmers National Banc Corp., subject to an overall limitation of 85% of the Monitor common shares being exchanged for Farmers common shares and 15% exchanged for cash.  The per share cash consideration of $769.38 is equal to Monitor’s March 31 tangible book value multiplied by 1.25.  Based on the volume weighted average closing price of Farmers common shares for the 20 trading days ended August 11, 2017 of $14.04, the final stock exchange ratio was 54.80, resulting in an implied value per Monitor common share of $769.38.

Goodwill of $1.0 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the companies.  The goodwill was determined not to be deductible for income tax purposes.  The fair value of other intangible assets of $673 thousand is related to core deposits.

The following table summarizes the consideration paid for Monitor and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

1,154

 

Stock

 

6,358

 

Fair value of total consideration transferred

$

7,512

 

Fair value of assets acquired

 

 

 

Cash and due from financial institutions

$

17,673

 

Securities available for sale

 

3,057

 

Loans, net

 

19,315

 

Premises and equipment

 

192

 

Core deposit intangible

 

673

 

Other assets

 

272

 

Total assets

 

41,182

 

Fair value of liabilities assumed

 

 

 

Deposits

 

34,586

 

Accrued interest payable and other liabilities

 

121

 

Total liabilities

 

34,707

 

Net assets acquired

$

6,475

 

Goodwill created

 

1,037

 

Total net assets acquired

$

7,512

 

The valuation of some assets acquired or created including but not limited to net loans and goodwill are preliminary and could be subject to change.  The Company does not expect any adjustments to the valuations of these acquired assets to occur and if so the adjustments are not expected to be material.

On June 1, 2016, the Bank completed the acquisition of the Bowers Insurance Agency, Inc., and merged all activity of Bowers with Insurance, the Bank’s wholly-owned insurance agency subsidiary.  The Bowers group is engaged in selling insurance including commercial, farm, home, and auto property/casualty insurance and will help to meet the needs of all the Company’s customers.  The transaction involved both cash and 123,280 shares of stock totaling $3.2 million, including up to $1.2 million of future payments, contingent upon Bowers meeting performance targets, with an estimated fair value at the acquisition date of $880 thousand.  The first of three contingent payments of cash and stock were made, during July 2017, totaling $316 thousand, which reduce the earnout payable to $564 thousand.  Subsequent to the first payment, management conducted a valuation of the contingent consideration and found it necessary to reduce the future payment liability associated with the remaining two payments down to $200 thousand at year end 2017.  The $364 thousand was recorded as a reduction to acquisition related costs in the Consolidated Statements of Income as of December 31, 2017.  The Company conducts this valuation work annually.  The earnout calculation for the second of three contingent payments was completed during June of 2018 and determined that no payment was earned or due.  The acquisition is part of the Company’s plan to increase the levels of noninterest income and to complement the existing insurance services currently being offered.

Goodwill of $1.8 million, which is recorded on the balance sheet, arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the companies.  The goodwill was determined not to be deductible for income tax

9


 

purposes.  The fair value of other intangible assets of $1.6 million is related to client relationships, company name and noncompetition agreements.

The following table summarizes the consideration paid for Bowers and the amounts of the assets acquired and liabilities assumed on the closing date of the acquisition.

 

(In Thousands of Dollars)

 

 

 

Consideration

 

 

 

Cash

$

1,137

 

Stock

 

1,138

 

Contingent consideration

 

880

 

Fair value of total consideration transferred

$

3,155

 

Fair value of assets acquired

 

 

 

Cash

$

64

 

Premises and equipment

 

290

 

Other assets

 

34

 

Total assets acquired

 

388

 

Fair value of liabilities assumed

 

124

 

Net assets acquired

$

264

 

 

 

 

 

Assets and liabilities arising from acquisition

 

 

 

Identified intangible assets

 

1,630

 

Deferred tax liability

 

(588

)

Goodwill created

 

1,849

 

Total net assets acquired

$

3,155

 

The following table presents pro forma information as if the Monitor acquisition that occurred during August 2017 actually took place at the beginning of 2017.  The pro forma information includes adjustments for merger related costs, amortization of intangibles arising from the transaction and the related income tax effects.  The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effective on the assumed date.

 

 

For Three Months

Ended June 30,

 

 

For Six Months

Ended June 30,

 

(In thousands of dollars except per share results)

2017

 

 

2017

 

Net interest income

$

18,705

 

 

$

36,567

 

Net income

$

5,776

 

 

$

11,625

 

Basic and diluted earnings per share

$

0.21

 

 

$

0.42

 

 

 

Securities:

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio at June 30, 2018 and December 31, 2017 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

6,810

 

 

$

0

 

 

$

(153

)

 

$

6,657

 

State and political subdivisions

 

201,170

 

 

 

1,824

 

 

 

(2,860

)

 

 

200,134

 

Corporate bonds

 

1,207

 

 

 

0

 

 

 

(26

)

 

 

1,181

 

Mortgage-backed securities - residential

 

158,515

 

 

 

35

 

 

 

(5,980

)

 

 

152,570

 

Collateralized mortgage obligations - residential

 

16,313

 

 

 

0

 

 

 

(932

)

 

 

15,381

 

Small Business Administration

 

13,466

 

 

 

0

 

 

 

(499

)

 

 

12,967

 

Totals

$

397,481

 

 

$

1,859

 

 

$

(10,450

)

 

$

388,890

 

10


 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

(In Thousands of Dollars)

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

 

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Fair Value

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government sponsored entities

$

8,986

 

 

$

0

 

 

$

(69

)

 

$

8,917

 

State and political subdivisions

 

188,032

 

 

 

3,614

 

 

 

(643

)

 

 

191,003

 

Corporate bonds

 

1,238

 

 

 

4

 

 

 

(8

)

 

 

1,234

 

Mortgage-backed securities - residential

 

161,635

 

 

 

419

 

 

 

(1,604

)

 

 

160,450

 

Collateralized mortgage obligations - residential

 

17,898

 

 

 

0

 

 

 

(777

)

 

 

17,121

 

Small Business Administration

 

14,608

 

 

 

0

 

 

 

(396

)

 

 

14,212

 

Totals

$

392,397

 

 

$

4,037

 

 

$

(3,497

)

 

$

392,937

 

 

Proceeds from the sale of portfolio securities were $2.3 million during the three month and $2.6 million during the six month period ended June 30, 2018.  Gross gains of $2 and $6 thousand along with gross losses of $1 and $3 thousand were realized on these sales during the three and six month periods ended June 30, 2018.  $26 and $42 thousand of unrealized gains were recognized in the income statement for equity securities during the three and six month periods as a result of adoption of ASU 2016-01.  Proceeds from the sale of portfolio securities were $11.2 million during the three month and $54.5 million during the six month periods ended June 30, 2017.  Gross gains were $168 thousand and $730 thousand along with gross losses of $182 and $731 thousand during the same three and six month periods ended June 30, 2017.

The amortized cost and fair value of the debt securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

 

 

 

June 30, 2018

 

(In Thousands of Dollars)

 

Amortized Cost

 

 

Fair Value

 

Maturity

 

 

 

 

 

 

 

 

Within one year

 

$

10,884

 

 

$

10,901

 

One to five years

 

 

46,736

 

 

 

46,521

 

Five to ten years

 

 

128,523

 

 

 

128,164

 

Beyond ten years

 

 

23,044

 

 

 

22,386

 

Mortgage-backed, collateralized mortgage obligations and Small Business Administration securities

 

 

188,294

 

 

 

180,918

 

Total

 

$

397,481

 

 

$

388,890

 

 

 

The following table summarizes the investment securities with unrealized losses at June 30, 2018 and December 31, 2017, aggregated by major security type and length of time in a continuous unrealized loss position.   

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(In Thousands of Dollars)

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

 

Value

 

 

Loss

 

June 30, 2018